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Performance and Accountability Series:



January 2003:



Major Management Challenges and Program Risks:



Department of the Treasury:



GAO-03-109:



A Glance at the Agency Covered in This Report:



The Department of the Treasury is responsible for a broad scope of 

activities that touch the lives of all Americans, including:

*collecting taxes to finance government operations;

*managing the governmentís finances; and

*carrying out law enforcement activities, such as securing U.S. borders 

and adding to homeland security, *controlling firearms-related crime, 

and managing seized assets. 



This Series:



This report is part of a special GAO series, first issued in 1999 and 

updated in 2001, entitled the Performance and Accountability Series: 

Major Management Challenges and Program Risks. The 2003 Performance 

and Accountability Series contains separate reports covering each 

cabinet department, most major independent agencies, and the U.S. 

Postal Service. The series also includes a governmentwide perspective 

on transforming the way the government does business in order to meet 

21st century challenges and address long-term fiscal needs. The 

companion 2003 High-Risk Series: An Update identifies areas at high 

risk due to either their greater vulnerabilities to waste, fraud, 

abuse, and mismanagement or major challenges associated with their 

economy, efficiency, or effectiveness. A list of all of the reports 

in this series is included at the end of this report.



GAO Highlights:



Highlights of GAO-03-109, a report to Congress included as part of 

GAOís Performance and Accountability Series



Why GAO Did This Report:



In its 2001 performance and accountability report on the Department 

of the Treasury, GAO identified important tax systems modernization, 

border security, trade regulation, financial management, and other 

issues facing the department. The information GAO presents in this 

report is intended to help to sustain congressional attention and a 

departmental focus on continuing to make progress in addressing 

these challenges and ultimately overcoming them. This report is 

part of a special series of reports on governmentwide and agency-

specific issues.



What GAO Found:



The Department of the Treasury (Treasury) helps promote a stable 

economy, manages the governmentís finances, and safeguards federal 

financial systems and our nationís leaders. Given these multiple 

missions, Treasury and its components confront several performance 

and accountability challenges.



Internal Revenue Service (IRS): IRS is now halfway through a 10-year 

modernization effort to improve taxpayer service and better ensure 

compliance. IRS has made progress in laying a management foundation 

to improve its performance, including reorganizing into customer-

focused operating divisions, bringing new computer systems on-line, 

and producing reliable year-end financial statements. However, IRS 

still faces challenges in improving compliance and collection, 

deploying major business systems, implementing new performance 

measures, developing reliable cost-based performance information, 

and securing its computer systems.



U.S. Customs Service: In the aftermath of the 9/11 terrorist 

attacks, recent legislation established a new Department of 

Homeland Security that will absorb Customs. Regardless of this 

change, Customs is challenged to safeguard U.S. borders against 

the illegal entry of goods, including weapons of mass destruction, 

while efficiently regulating legitimate commercial activity. 

While some of Customsís work to address these challenges cannot be 

discussed in this report due to its sensitive nature, two 

challenges Customs is working on include enhancing its trade 

compliance program and acquiring a new trade system.



Financial Management: Treasury faces many challenges in improving 

its financial management systems and correcting internal control 

weaknesses, particularly at IRS and Customs. As the governmentís 

fiscal agent, Treasury is also challenged to prepare reliable 

financial statements for the U.S. government, improve debt collection, 

and strengthen computer security controls at its Financial Management 

Service. Both the Treasury Department and IRS issued audited financial 

statements 6 weeks after the end of fiscal year 2002.



What Remains to Be Done:



IRS: Continue efforts to improve service, ensure compliance, maintain 

comparable performance measures, manage systems modernization, and 

implement effective computer security.



Customs: Enhance evolving trade compliance program and implement new 

trade system through continuous improvement and effective resource 

management.



Financial Management: Improve bureau operations, strengthen internal 

controls, ensure compliance with a key law, continue to improve debt 

collection, and strengthen computer security.



www.gao.gov/cgi-bin/getrpt?GAO-03-109.  To view the full report, 

click on the link above. For more information, contact Norm Rabkin 

at (202) 512-9110 or rabkinn@gao.gov.



Transmittal Letter:



Major Performance and Accountability Challenges:



GAO Contacts:



Related GAO Products:



Performance and Accountability and High-Risk Series:



Transmittal Letter January 2003:



The President of the Senate

The Speaker of the House of Representatives:



This report addresses the major management challenges facing the 

Department of the Treasury (Treasury) as it seeks to carry out certain 

aspects of its economic, financial, enforcement, and management 

missions. It is part of a special series GAO has issued biennially 

since January 1999, entitled the Performance and Accountability Series: 

Major Management Challenges and Program Risks. This report discusses 

the actions Treasury has taken and that are under way to address the 

challenges GAO reported in its series 2 years ago, in January 2001, and 

major events that have occurred that significantly influence the 

environment in which the department carries out its mission. Also, GAO 

summarizes the challenges that remain and further actions that GAO 

believes are needed.



This analysis should help the new Congress and the administration carry 

out their responsibilities and improve government for the benefit of 

the American people. For additional information about this report, 

please contact Norm Rabkin, Managing Director, Tax Administration and 

Justice, at

(202) 512-9110 or at rabkinn@gao.gov.



David M. Walker

Comptroller General

of the United States:



Signed by David M. Walker



[End of section]



Major Performance and Accountability Challenges:



According to its mission statement, the Department of the Treasury 

(Treasury) promotes prosperous and stable domestic and international 

economies; manages the governmentís finances; and safeguards our 

financial systems, protects our nationís leaders, and secures a safe 

and drug-free America. With a fiscal year 2002 budget of $16.4 billion 

in discretionary spending and a staff of about 150,000, Treasuryís 

responsibilities are divided among 12 major components, including the 

Internal Revenue Service (IRS); Bureau of Alcohol, Tobacco, and 

Firearms (ATF); Financial Management Service (FMS); U.S. Customs 

Service (Customs); and U.S. Secret Service.[Footnote 1] In helping 

Treasury meet its overall mission, these components confront several 

major performance and accountability challenges.



In our last report of January 2001, we identified five major 

performance and accountability challenges for Treasury and its 

components.[Footnote 2] These included (1) modernizing the IRS to 

better help taxpayers meet their tax responsibilities and increase 

overall compliance with tax laws, 

(2) improving Customsís regulation of commercial trade while ensuring 

protection against the entry of illegal goods at U.S. borders, (3) 

achieving sound financial management through sustained management 

attention and priority, (4) developing measurable performance targets 

to assess ATFís progress in reducing criminalsí access to firearms, and 

(5) improving asset forfeiture program management and accountability. 

We noted the specific steps Treasury had taken to address the 

challenges, while pointing out areas in which Treasury had not made 

enough progress.



Since Treasury has made significant progress on two of the five 

challenges identified in our last report--ATF performance targets and 

asset forfeiture program management--we have removed these from 

consideration in this report.[Footnote 3] The other three challenges, 

however, continue to confront Treasury--IRS modernization, Customs 

regulation of commercial trade, and Treasury financial management. 

Addressing these three challenges will require sustained managerial 

attention and commitment, as well as oversight and evaluations from 

independent organizations.



[See PDF for image] 



[End of figure] 



Modernize IRS to Better Help Taxpayers Meet Their Tax Responsibilities 

and to Increase Overall Compliance with Tax Laws:



IRS has now invested 5 years in a modernization effort intended to 

improve service to taxpayers and better ensure taxpayer compliance with 

the tax laws. This is half way through the 10 years IRS estimated would 

be needed. So far, IRS has made important progress at laying the 

management foundation for a more modern agency that is able to respond 

to taxpayer needs faster, more accurately, and at a lower cost. 

However, at this time, neither the foundation nor the structure--the 

reengineered processes that would deliver better service and improve 

compliance--is complete. IRS must successfully manage several 

significant challenges that threaten continued modernization. 

Challenges include reversing the decline in compliance and collection 

programs, managing the deployment of several large business systems, 

and implementing new performance measures and management processes.



IRSís modernization strategy encompasses five components--business 

practices, agency organization, performance measurement, managerial 

accountability, and new technology. As shown in figure 1, the 

components are the foundation for a modern agency that can achieve its 

goals of providing better service and ensuring compliance while using 

resources productively. The components are interrelated; for example, 

new technology will support revamped practices, and performance 

measures will be used to ensure accountability. Each component, by 

itself, is a major effort. Because the components are interrelated, IRS 

must make progress on all of the components in a coordinated fashion. 

For these reasons, IRSís modernization effort is ambitious and complex.



Figure 1: Overview of IRSís Modernization Program:



[See PDF for image] - graphic text:



[End of figure] - graphic text:



IRS has made important progress in developing and implementing the five 

components of modernization. However, continued progress depends on 

meeting a number of challenges. Table 1 summarizes the progress IRS has 

made on the five modernization components and identifies seven major 

challenges associated with three of the components.



Table 1: Summary of IRSís Modernization Accomplishments and Challenges:



Modernization component: Customer focused operating divisions; Major 

accomplishments: * Reorganized into four operating divisions, each 

responsible for a group of taxpayers with similar needs (FY2001); 

Challenges remaining: [Empty].



Modernization component: Management roles with clear responsibility; 

Major accomplishments: * Implemented new strategic planning, budgeting, 

and performance management system; * Assigned responsibility for 

improvement projects; * Redirected almost 2,300 staff positions toward 

higher priorities; Challenges remaining: [Empty].



Modernization component: Revamped business practices; Major 

accomplishments: * Brought new systems on-line, including telephone 

call routing and data support systems; * Initiated efforts to 

reengineer major business systems, including examination and collection 

programs; Challenges remaining: * Improving service to taxpayers; * 

Collecting taxes that are due the government but not voluntarily paid 

by taxpayers; * Making appropriate payments to taxpayers claiming the 

earned income credit.



Modernization component: Balanced measurement of performance; Major 

accomplishments: * Established an evaluation system for frontline 

employees aligned with service and compliance goals; * Initiated 

program to measure voluntary compliance rate; * Produced reliable year-

end financial statements; Challenges remaining: * Establishing measures 

comparable over time and collecting sufficient performance data; * 

Addressing financial management weaknesses to develop reliable cost-

based performance information.



Modernization component: New technology; Major accomplishments: * 

Adopted GAO recommendations regarding management controls for 

information systems acquisition and implementation; * Continued toward 

fully implementing complex information systems and bringing more 

limited systems on-line; Challenges remaining: * Managing the Business 

Systems Modernization program; * Implementing effective computer 

security.



[End of table]



Source: GAO analysis of IRS.



As already noted, the components of IRSís modernization effort are 

interrelated, and consequently, the seven challenges are interrelated. 

Maximum progress on modernization will only be made if IRS 

simultaneously and successfully deals with all seven challenges.



Improving Service to Taxpayers:



Improving service to taxpayers remains a challenge for IRS. The 

progress that IRS has made to date in modernizing has, as noted, laid a 

foundation for improvement but has not yet provided the quality of 

service that taxpayers, Congress, and IRS management agree is needed.



Providing good service to taxpayers by making it as easy as possible 

for them to understand and meet their tax obligations could improve 

voluntary compliance--payments and tax returns filed without IRS audit 

and collection action--and reduce the need for these intrusive and 

costly enforcement activities. A major principle of IRSís modernization 

effort is that understanding the taxpayerís point of view and improving 

service is fundamental to helping the majority of taxpayers who are 

willing to comply with the tax laws and pay what they owe. A related 

principle is that preventing compliance problems by educating and 

informing taxpayers, or helping taxpayers resolve problems early on, is 

less expensive and time consuming for both IRS and the taxpayer than 

enforcement action taken later. Facilitating voluntary compliance is 

especially important because the U.S. tax system relies on it. As shown 

in figure 2, almost all tax revenue that is collected is paid through 

withholding, remittances sent with tax returns, or other forms of 

payment, without any IRS enforcement action.



Figure 2: Tax Revenue Collected through Voluntary Payments or IRS 

Enforcement Action:



[See PDF for image]



[End of figure] 



Table 2 shows the recent improvement in selected aspects of taxpayer 

service, as well as the level of current service. Taxpayers still have 

difficultly reaching IRS and, when they do get through, they may not be 

able to rely on the accuracy of the information IRS provides. For 

example, the percentage of phone calls to assistors that received 

service increased to 

71 percent in the 2002 tax filing season, yet the remaining 29 percent 

attempting to reach an assistor hung up or were disconnected without 

receiving service. IRS officials credited the 2002 filing season 

improvement to, among other efforts, call routing system improvements. 

Treasury Inspector General for Tax Administration (TIGTA) data suggest 

that the tax law information IRS provided at walk-in locations improved 

from 2001 to 2002, despite a lack of comparable data. Nonetheless, in 

2002, the tax law information provided was incorrect 50 percent of the 

time.



Table 2: Selected Performance Measures of IRS Telephone and Walk-in 

Assistance in the Tax Filing Season:



Telephone accessibility measures: CSR level of service[A]; 2000: 

Telephone accessibility measures: 61%; 2001: Telephone accessibility 

measures: 68%; 2002: Telephone accessibility measures: 71%.



Telephone accessibility measures: Telephone accuracy measures; 2000: 

Telephone accessibility measures: [Empty]; 2001: Telephone 

accessibility measures: [Empty]; 2002: Telephone accessibility 

measures: [Empty].



Telephone accessibility measures: Tax law correct response rate[B]; 

2000: Telephone accessibility measures: N/A [C]; 2001: Telephone 

accessibility measures: 79% +/-1%; 2002: Telephone accessibility 

measures: 85% +/-1%.



Telephone accessibility measures: Walk-in accuracy measures; 2000: 

Telephone accessibility measures: [Empty]; 2001: Telephone 

accessibility measures: [Empty]; 2002: Telephone accessibility 

measures: [Empty].



Telephone accessibility measures: Tax law correct answers rate[D]; 

2000: Telephone accessibility measures: N/A[ C]; 2001: Telephone 

accessibility measures: N/A[ C]; 2002: Telephone accessibility 

measures: 50%.



Source: IRS and TIGTA.



[A] The percentage of calls that IRS estimates were from callers 

attempting to reach an assistor, also called a customer service 

representative (CSR), that received service, including some calls 

answered through automation, from January through mid-July.



[B] Estimate of the percentage of calls in which assistors provided 

correct responses from January through June.



[C] Comparable data is not available.



[D] The percentage of questions that were answered correctly in test 

walk-in contacts from January through April.



[End of table]



Part of what makes improving service such a challenge is the volume of 

requests for taxpayer assistance. For example, IRS data indicates that 

in the 2002 filing season, taxpayers called IRS about 100 million 

times, with an estimated 30 million of those calls to an assistor, as 

opposed to IRSís automated services. IRS had about 10,000 assistors on 

board to answer those calls.



A common theme in our recent reports on taxpayer service is the need 

for improved management of IRSís service functions, such as telephone 

assistance. Specifically, we have recommended explicit goal setting, 

improved performance measures, and more program evaluation. Such 

practices would enable IRS managers and frontline staff to better 

understand what they are trying to accomplish, how their actual 

performance compares to their objectives, and the reasons for any gaps. 

Armed with such information, IRS managers would be better positioned to 

make decisions regarding improvement actions.



Another related theme is the need for improved human capital 

management. We have recognized that IRSís new performance management 

system could be a powerful tool to help IRS achieve its mission, and 

that system weaknesses could make it less effective in ensuring that 

employees at every level of the organization are working toward common 

goals. For telephone performance, we have called for systems and 

evaluations to identify gaps in assistorsí skills, meet training needs 

to fill those gaps, monitor and address the causes of attrition, and 

ensure that human capital management practices help IRS achieve 

taxpayer service goals.



IRS has generally agreed with our recommendations and has taken action 

to implement them. For example, more focus is being placed on long-term 

goals in planning documents. However, management improvements will have 

to be sustained over time so taxpayers can see benefits in the form of 

improved service.



In addition to the challenge of making changes that achieve long-term 

improvements, revamping taxpayer service will require that IRS 

simultaneously meet the other significant management challenges 

discussed in this report. For example, to ensure that changes result in 

efficient, improved service, IRS will need to establish comparable 

measures over time, collect sufficient data to identify ways to improve 

service, and develop cost-based performance information to identify the 

costs of achieving improved results.



Collection of Unpaid Taxes:



Collecting taxes due the government[Footnote 4] has always been a 

challenge for IRS, but in recent years the challenge has grown. In 

testimonies and reports we have highlighted large and pervasive 

declines in IRSís compliance and collections programs. For example, 

between 1996 and 2001 the programs generally experienced larger 

workloads, less staffing, and fewer numbers of cases closed per 

employee. By the end of fiscal year 2001, IRS was deferring collection 

action on about one out of every three tax delinquencies assigned to 

the collections programs. As of September 30, 2002, IRS had an 

inventory of known unpaid taxes, including interest and penalties, 

totaling $249 billion, of which $112 billion has some collection 

potential and, thus, is at risk.[Footnote 5]



To reverse these trends, IRS is in various stages of planning and 

implementing management improvements, including reengineering 

compliance and collection practices, collecting better data about 

noncompliance, and investing in modern financial and information 

systems. Because of the magnitude of these efforts, the collection of 

unpaid taxes is a major management challenge. Because of the potential 

revenue losses and the threat to voluntary compliance this is also a 

high-risk area.



Many view a visible enforcement program as critical for our tax system. 

While improving taxpayer service may enhance voluntary compliance, 

taxpayersí willingness to voluntarily comply with the tax laws depends 

in part on their having confidence that their friends, neighbors, and 

business competitors are paying their fair share of taxes. To provide 

that confidence, IRS operates a number of compliance and collection 

programs, including computerized checks for nonfiling and underreported 

income, audits, and telephone and field collections.



For the last several years, Congress and others have been concerned 

that the declines in IRSís compliance and collections programs are 

eroding taxpayersí confidence in the fairness of our tax system. 

Indeed, in May 2002 congressional hearings, the IRS Commissioner said 

that IRS was not providing taxpayers with adequate assurance that their 

neighbors or competitors were complying with the tax laws and paying 

what they owed.[Footnote 6]



IRSís strategy to reverse the compliance and collection program 

declines is ambitious and, therefore, challenging. Generally, the 

strategy intends to improve the productivity of IRSís existing 

compliance and collections staff and better target noncompliance. By 

reengineering the compliance and collections programs (and augmenting 

the programs with staff freed up elsewhere in IRS), IRS hopes to 

significantly increase its compliance and collections efforts. The 

reengineering efforts rely heavily on technology modernization, which 

is also a high-risk management challenge.



Better targeting of noncompliance requires better information. IRSís 

new effort to review compliance, the National Research Program (NRP), 

should, if implemented as planned, provide IRS with the first up-to-

date information on compliance rates and sources of noncompliance since 

it last measured the compliance rate using 1988 tax returns. Such 

information could be another input into IRSís strategic planning, 

budgeting, and performance management process and used to set agency 

priorities and allocate resources. However, we remain concerned about 

IRSís ability to appropriately allocate its enforcement resources, 

including staff, to its various compliance and collections activities. 

For example, as we have reported,[Footnote 7] IRS has not been able to 

readily determine the full cost of its various programs and activities. 

Without this information, IRS cannot perform cost-benefit analyses to 

ascertain whether the resources it has devoted to compliance programs 

were appropriate relative to costs and potential benefits.



IRS has agreed with the recommendations we made regarding 

implementation of NRP and more effective use of data in the strategic 

planning, budgeting, and performance management process. IRS has also 

agreed with us about the need for better cost data on its enforcement 

activities and has been developing a centralized cost accounting system 

expected to be deployed in late 2003. Successfully completing these 

actions will be a challenge. However, implementation should provide IRS 

managers with better information about how to effectively and 

efficiently target noncompliance.



While our reports on the collection of unpaid taxes have focused on the 

efficiency with which existing compliance and collections resources are 

used, the IRS Commissioner has raised the issue of whether the existing 

resources, even if used efficiently, can provide an adequate level of 

enforcement. In a September 2002 report to the IRS Oversight Board, the 

Commissioner said that IRS has been facing a growing compliance 

workload at the same time that resources were declining. He said the 

result is a ďhuge gapĒ between the number of taxpayers who are not 

filing, not reporting, or not paying what they owe and IRSís capacity 

to deal with them. Whether the Commissioner is correct about the 

magnitude of this problem depends in part on policy makersí judgments 

about how large an enforcement presence IRS needs to provide taxpayers 

with confidence that all taxpayers are paying their fair share of 

taxes.



Earned Income Credit Noncompliance:



In addition to collecting taxes, IRS is also responsible for 

administering tax code provisions that make financial assistance 

available to the working poor. Under the code, taxpayers who meet 

earned income, family size, and other requirements are authorized to 

claim the earned income credit. The credit offsets the impact of the 

social security taxes paid by low-income workers and is intended to 

encourage low-income persons to seek work rather than welfare. For most 

recipients, the credit amount exceeds the amount of their income tax 

liability; in such cases, because the credit is refundable, the 

taxpayers receive a refund.



There are significant compliance problems associated with the earned 

income credit that have led us to list IRSís administration of the 

credit as a high-risk area for the federal government. IRS estimates 

that of the 

$31.3 billion in earned income credits claimed by taxpayers in tax year 

1999, about $8.5 to $9.9 billion should not have been paid.[Footnote 8] 

This level of noncompliance has remained relatively unchanged even 

after a 5-year effort to reduce it. Because IRS has struggled to reduce 

the overclaim rate and because of the magnitude of the financial risk, 

earned income credit noncompliance has been and remains both a 

management challenge and a high-risk area.



The design of the earned income credit may contribute to noncompliance. 

As we have reported,[Footnote 9] certain features of the credit 

represent a trade-off between compliance and other desired goals. 

Unlike other income transfer programs, such as Temporary Assistance for 

Needy Families and Food Stamps, the earned income credit was designed 

to be administered through the tax system. Accordingly, while the other 

programs have staff that review documents and other evidence before 

judging applicants to be qualified to receive assistance, 

administration of the credit relies more directly on the self-reported 

qualifications of individuals. This approach generally should result in 

lower administrative costs and possibly higher participation rates for 

the credit than other assistance programs. However, earned income 

credit noncompliance may also be higher.



IRS has to balance its efforts to combat noncompliance with its efforts 

to help ensure that qualified persons claim the credit. With the data 

available, we were able to estimate that for every three households 

that claimed the credit, there was an additional eligible household 

that did not.[Footnote 10]



The IRS Commissioner and the Assistant Secretary for Tax Policy have 

convened a high-level Treasury/IRS task force to develop 

recommendations to better administer the credit and make it easier for 

taxpayers to comply with the rules. However, until IRS has designed and 

implemented effective controls to deal with noncompliance and the 

erroneous refunds that result, this will remain a high-risk area.



Establishing Measures Comparable over Time and Collecting Sufficient 

Performance Data:



A sound organizational performance and human capital management system 

is essential for assessing how well IRS meets its goals and for making 

program improvements. IRS has made progress in revamping its 

performance management system by using its strategic planning, 

budgeting, and performance management process to reconcile competing 

priorities and initiatives with the realities of available resources. 

Also, in October 2001, IRS rolled out its new employee evaluation 

system for frontline employees. This main human capital management 

system, like that implemented earlier for executives and managers, was 

designed to structurally align performance expectations for employees 

with IRSís three strategic goals to encourage behaviors and actions 

that support and advance those goals. IRS has also made progress in 

developing a way to measure the voluntary compliance of individual 

taxpayers without placing undue burden on them. In late 2002, IRS 

started to collect data to measure voluntary compliance, update 

criteria used to select tax returns for audit, and make operational 

changes that could improve compliance.



While this progress is notable, several aspects of the performance 

management system make measuring, assessing, and improving 

organizational and employee performance risky. Our work over the past 

couple of years has shown that IRS could do a better job of designing 

and implementing performance measures and program evaluation practices 

that support its on-going business operations, modernization efforts, 

and budget requests. Further, IRS could make additional progress in 

linking its budget request to intended results so that Congress could 

make more informed budget decisions and better assess IRSís use of 

resources. IRS could also improve the alignment between strategic goals 

and elements of the frontline employee performance management system 

and ensure that the new performance management systems for frontline 

employees and managers are working as intended.



To address these risky aspects, IRS needs to take a number of actions. 

First, it needs to ensure that its organizational performance measures 

are (1) objective and reliable; (2) consistent through time, and thus, 

comparable; and (3) limited to key performance indicators. Second, IRS 

needs to do more and better evaluations of its programs so it can 

better determine the factors that affect program performance and 

identify ways to use resources more effectively and improve service and 

compliance. Third, and in keeping with the Government Performance and 

Results Act of 1993, IRS should continue its efforts to better link 

budget requests with program results. Finally, IRS should ensure that 

its human capital management systems reinforce behaviors that support 

strategic goals by clearly aligning employee and organizational 

objectives, ensuring that managersí expectations are specific and 

output-or outcome-oriented, and monitoring whether employee feedback is 

useful and aligned with IRSís goals.



Addressing Financial Management Weaknesses to Develop Reliable Cost-

Based Performance Information:



In addition to using performance measures to assess progress in 

improving customer service and increasing compliance, IRS also needs to 

know the cost of achieving these results. Reliable cost information is 

critical for IRS management and Congress to determine whether IRS has 

the appropriate levels of funding and staff and is effectively using 

them. However, serious financial management weaknesses--a high-risk 

area since 1995--hurt IRSís ability to develop reliable, cost-based 

performance information and to ensure that resources were spent only in 

accordance with laws, regulations, and management policy. To address 

these issues, we have provided IRS with detailed management and 

operational recommendations. IRSís senior management has been proactive 

in addressing these issues and has played a major role in the progress 

IRS has achieved to date. However, resolving many of IRSís most serious 

problems will require a sustained, long-term commitment of resources, 

continued involvement of senior management, and sustained progress in 

systems modernization.



IRS has made significant progress in addressing its financial 

management weaknesses, including addressing deficiencies in controls 

over budgetary activity and its accountability over property and 

equipment (P&E). IRS implemented procedures to deobligate funds no 

longer required for a specific purpose, and developed compensating 

procedures to address several of the budgetary control weaknesses we 

previously reported. For example, IRS (1) instituted the routine review 

of contracts to better manage obligational authority, (2) developed 

procedures to identify and eliminate from the applicable general ledger 

accounts transactions that were incorrectly recorded as adjustments to 

prior yearsí obligations, and (3) revised its accrual methodology to 

address reported deficiencies in controls over the accurate recording 

of undelivered orders and accrued expenses. IRS also continued its 

efforts to correct long-standing deficiencies in systems and controls 

over its P&E. Specifically, IRS

(1) initiated annual physical inventories at its headquarters and its 

field offices and is using the results to annually update its P&E 

inventory records, (2) implemented a new inventory system for its 

automated data processing assets, and (3) implemented procedures to 

improve the timeliness of recording P&E acquisitions in its accounting 

records. While further efforts are needed in both areas, IRS has made 

significant progress since our last report.



For fiscal year 2002, IRS was able to produce financial statements 

covering its tax custodial and administrative activities that are 

fairly stated in all material respects and was able to accomplish this 

6 weeks after the end of the fiscal year.[Footnote 11] This was a 

significant achievement and was the result of tremendous dedication and 

effort on the part of IRSís senior management and staff, as well as 

some significant changes in certain business practices. However, it 

also necessitated the continued use of costly, resource-intensive 

processes to compensate for its long-standing and pervasive internal 

control and systems deficiencies. IRS continues to lack timely, 

accurate, and useful financial information and sound controls with 

which to make fully informed decisions and to ensure ongoing 

accountability. Despite the progress made, our audits of IRSís fiscal 

year 2002 and 2001 financial statements continued to identify the 

existence of five material weaknesses in internal controls and two 

instances of noncompliance with provisions of the Internal Revenue Code 

related to the timing of IRSís releasing of tax liens and the 

structuring of installment agreements with taxpayers. Additionally, we 

found that IRSís financial management systems continued to be in 

substantial noncompliance with the requirements of the Federal 

Financial Management Improvement Act of 1996 (FFMIA).[Footnote 12]



In fiscal year 2002, as in prior years, IRS did not have adequate 

financial management systems to enable it to routinely and reliably 

generate and report the information needed to prepare financial 

statements and manage operations on an ongoing and timely basis. IRS 

did not always timely record material transactions in its general 

ledger system, including taxes receivable. In addition, IRS uses 

separate general ledgers to account for its tax collection activities 

and the costs of conducting those activities, respectively. This 

separation greatly complicates efforts to measure the cost of its tax 

collection efforts.



IRS still lacks a centralized and integrated cost accounting system 

capable of providing timely and reliable cost information related to 

its activities and programs. Without such a system, managers may lack 

ready information to manage costs and make decisions. During fiscal 

year 2002, IRS conducted a comprehensive assessment of its strategic 

priorities as part of its strategic planning process. A major goal of 

this exercise was to prioritize IRSís programs relative to its mission 

in light of its available resources. IRS is using the outcome of this 

process as a basis for resource allocation decisions. This initiative 

represents a major step forward in IRSís efforts to ensure it is using 

its resources as efficiently and effectively as possible. As we have 

stated previously, addressing the financial management issues we have 

reported on would enhance this process by providing sound, reliable, 

and timely information to assist in evaluating the impact of these 

decisions in terms of both the costs incurred and the benefits derived.



To address its need for reliable cost-based performance information, 

IRS is developing a cost accounting system that is scheduled for 

implementation in late 2003. Informed business decision making depends 

on this systemís successful implementation.



Managing the Business Systems Modernization Program:



IRSís multi-billion dollar Business Systems Modernization program is 

critical to the success of the agencyís efforts to transform its 

manual, paper-intensive business operations and fulfill its obligations 

under the IRS Restructuring and Reform Act of 1998.[Footnote 13] IRSís 

challenges in modernizing its business systems date back to the mid-

1990s, when we reported on a number of technical and management 

weaknesses and made a series of recommendations for correcting them and 

limiting modernization activities and spending until they were 

corrected.[Footnote 14] It was then that we designated the 

modernization program as a high-risk area.[Footnote 15] These 

challenges remained virtually unchanged until 1999, as IRS made limited 

progress in implementing our recommendations, and our ongoing reviews 

of the program continued to identify additional weaknesses and produce 

additional recommendations. Beginning in 1999, however, progress 

improved, particularly with respect to strengthening IRSís 

modernization management controls and capabilities.



Nevertheless, our last performance and accountability report continued 

to show the modernization program as high-risk for three primary 

reasons:[Footnote 16] (1) modernization of IRSís systems is vital to 

revamping how the service does business and is integral to IRS 

achieving its customer-focused vision; (2) the program is extremely 

complex and costly; and (3) IRS had not yet fully corrected all of its 

modernization management weaknesses, thereby increasing the risk that 

projects would not perform as intended and would cost more and take 

longer than necessary.



Since then, IRS has made important progress in a number of areas. 

First, it has progressed in establishing the infrastructure systems on 

which future business applications will run. Establishing this 

infrastructure is a necessary prerequisite to introducing the business 

applications that are intended to provide benefits to taxpayers and 

IRS. Second, it has made progress in delivering three applications 

(e.g., Internet Refund Fact of Filing) that are producing benefits as 

of today. Third, progress has been made in establishing the 

modernization management controls needed to effectively acquire and 

implement information technology systems. For example, IRS has 

developed and is using a modernization blueprint, commonly called an 

enterprise architecture, to guide and constrain its modernization 

projects, and is investing incrementally in its projects, both of which 

are leading practices of successful public and private-sector 

organizations.



Despite this important progress, IRSís business systems modernization 

program remains ďchallengedĒ and at high risk for two reasons. First, 

the scope and complexity of the program are growing. Specifically, the 

number of projects underway continues to expand and the tasks 

associated with those projects that are moving beyond design and into 

development are by their nature more complex and risky. Second, IRSís 

modernization management capacity is still maturing. For example, IRS 

has yet to fully implement a strategic approach to ensuring that it has 

sufficient human capital resources. It has also yet to fully implement 

management controls in such areas as estimating costs, and employing 

performance-based contracting methods.



The challenge for IRS is to make sure the pace of systems acquisition 

projects does not exceed the agencyís ability to manage them 

effectively, which was a problem in the past. In February 2002 we 

reported[Footnote 17] such an imbalance due to IRSís first priority and 

emphasis being getting the newer, more modern systems--with their 

anticipated benefits to taxpayers--up and running. In so doing, 

however, management controls had not been given equal attention and 

thus had not kept up. This emphasis on new systems progress adds 

significant cost, schedule, and performance risk that escalates as a 

program advances. Moreover, these risks are increased as IRS moves 

forward because interdependencies among current ongoing projects and 

the complexity of associated workload activities to be performed 

increases dramatically as more system projects are built and deployed.



In response to our concerns about projects getting ahead of the 

agencyís ability to manage them effectively[Footnote 18] and 

congressional direction, IRS scaled back its projects, giving priority 

to implementing needed management capacity. Nevertheless, IRS has 

continued to move forward with its ongoing infrastructure and business 

application system projects while simultaneously taking steps to 

implement missing management controls and capabilities, which in our 

view worsens the imbalance between project workload and needed 

management capacity. In our February 2002 report,[Footnote 19] we 

recommended that the Commissioner of Internal Revenue reconsider the 

scope and pace of the program to better balance it with the agencyís 

capacity to handle the workload. In response, IRS took steps to align 

the pace of the program with the maturity of IRSís controls and 

management capacity, including reassessing the portfolio of projects 

that it planned to proceed with during the remainder of fiscal year 

2002. Also, IRS made significant progress in improving its 

modernization management controls.



Although progress has been made, certain management controls have not 

been fully implemented. IRS has reported that most projects have 

already encountered cost, schedule, and/or performance shortfalls. Our 

analysis has shown that weak management controls contributed directly 

to these problems. Given that IRSís fiscal year 2003 systems 

modernization spending plan supports progress toward the later phases 

of key projects and continued development of other projects, systems 

modernization projects may encounter additional cost, schedule, and 

performance shortfalls.



IRS has acknowledged these risks and has initiatives planned or under 

way to address them. However, timing is critical. While the lack of 

controls can be risky in a projectís early stages, it is essential that 

such controls be in place when multiple interdependent projects are 

being designed, developed, and implemented. To mitigate this added 

risk, IRS needs to fully implement the remaining management controls 

that we have recommended. Until that time, the business systems 

modernization program remains high risk, and we will continue to 

monitor IRSís progress in this area.



Implementing Effective Computer Security:



IRS needs to continue addressing long-standing computer security 

weaknesses. Over the past 9 years, we have provided IRS with numerous 

recommendations to assist it in addressing weaknesses in its computer 

security controls.



IRS has continued to make progress improving computer security 

controls. For example, IRS has revised its information technology 

security policy and guidance, updated security standards for several of 

its computing systems and devices, and improved certain physical 

security controls at its data processing facilities. IRS is also 

consolidating several of its geographically dispersed computer systems 

and centralizing responsibility for their operation and maintenance, 

performing periodic internal control reviews of its computer-processing 

environments, and implementing an intrusion detection capability.



Despite important progress, much work remains to be done to resolve the 

serious weaknesses that threaten the confidentiality, integrity, and 

availability of IRS systems and taxpayer information. IRS continues to 

have serious weaknesses with computer controls designed to protect 

computing resources, such as networks, computer equipment, software 

programs, data, and facilities from unauthorized use, modification, 

loss, and disclosure. Computer security weaknesses relate to electronic 

access controls, physical security, segregation of duties, software 

change controls, and service continuity. These weaknesses exist, in 

part, because IRS has not yet fully implemented its agencywide computer 

security program. For example, IRS does not always effectively 

configure and implement computer systems in accordance with its 

computer security policies, monitor system configuration and 

implementation, and provide sufficient technical security-related 

training to key personnel. In addition, IRS has not taken sufficient 

steps to ensure that computer security weaknesses identified at one 

data processing facility are considered and addressed at other 

facilities. These weaknesses led us to report, as part of our audit of 

IRSís fiscal year 2002 financial statements,[Footnote 20] that computer 

security was a material weakness.[Footnote 21]



These weaknesses decrease the reliability and increase the 

vulnerability of data processed by IRSís information systems, and 

continue to expose IRSís tax processing operations to disruption. Until 

IRS can adequately mitigate these weaknesses, unauthorized individuals 

could gain access to critical hardware and software, and intentionally 

or inadvertently add, alter, or delete sensitive data or computer 

programs. Such individuals could also obtain personal taxpayer 

information and use it to commit financial crimes in the taxpayerís 

name (identity fraud), such as establishing credit and incurring debt.



Improve Customsís Management of Multiple Missions:



For years Customs has been performing the dual missions of enforcing 

laws to safeguard U.S. borders against the illegal entry of goods and 

of regulating legitimate commercial activity. To carry out its 

responsibilities, Customs has a total workforce of 19,500 employees at 

locations in the United States and around the world. In fiscal year 

2001, Customs reported that its officers processed 142 million 

conveyances;[Footnote 22] 472 million land, sea, and air passengers; 

and over 23 million import entries with a value of over $1 trillion, 

while collecting $23.8 billion in revenues. Customs has been challenged 

to balance its security measures with the need to facilitate the flow 

of cargo and people into the United States that is vital to our 

economy. Traditionally, Customsís primary security and enforcement 

focus had been on preventing the smuggling of drugs into the country.



In January 2001, we identified a number of challenges facing Customs in 

performing its dual missions.[Footnote 23] In addition to those we 

discuss in the following sections, the challenges included (1) 

assessing progress on key mission areas through the implementation of 

outcome-oriented performance measures; (2) improving the manner in 

which airline passengers who may be carrying contraband, such as 

illegal drugs, are searched while respecting the rights of American 

citizens; and (3) using reliable data to determine Customsís staffing 

needs and to ensure that personnel are deployed where they are needed. 

We have not conducted follow-on work on these challenges since our 

January 2001 report because the events of September 11, 2001, refocused 

our efforts primarily on security challenges. Thus, we do not discuss 

these challenges in this report.



The events of September 11 changed Customsís primary security and 

enforcement focus. Shortly after the September 11 events, the 

Commissioner of Customs said that terrorism has replaced drug smuggling 

as the agencyís top priority, and that Customsís traditional role in 

preventing the smuggling of drugs and other contraband would be 

affected by the new focus on terrorism. While the post-September 11 

focus will be on Customs being especially vigilant for keeping out of 

the country any ďimplements of terrorism,Ē such as chemical, 

biological, or nuclear materials that could be used as weapons, the 

agency still faces challenges associated with trade compliance and 

overall border security. Immediately after the terrorist attacks on 

September 11, Customs went to a ďLevel 1Ē alert across the country at 

all official border entry points--land border ports of entry, seaports, 

and international airports. Level 1, according to Customs, requires 

sustained, enhanced scrutiny and questioning of those entering the 

United States, and includes increased inspections of travelers and 

goods at every port of entry. Because of the continued terrorist 

threat, Customs has remained on Level 1 alert.



At the same time, Customs is challenged to ensure that antiterrorism 

efforts do not slow the flow of legitimate international commerce and 

travel. According to Customs, Customs has worked with importers on 

concerns such as where their goods originated, the physical security 

and integrity of their overseas plants and those of their foreign 

suppliers, the background of their personnel, the means by which they 

transport goods, and those whom they have chosen to transport their 

goods into the country. Customs has reaffirmed to importers the 

importance of knowing their customer, and has examined the security 

practices of their freight forwarders and the routes their shipments 

travel.



Concerning its diverse missions and responsibilities, our recently 

completed and ongoing work has identified additional challenges that 

directly or indirectly affect Customsís efforts to improve security at 

U.S. borders to safeguard against the illegal entry of goods, including 

potentially harmful, hazardous, or otherwise illegal commodities. These 

challenges include (1) improving differing international mail and 

package inspection processes; (2) ensuring that various illegal items, 

including weapons of mass destruction, do not enter the country in 

cargo containers at seaports; and (3) acquiring a new import processing 

system. According to Customs, the inspection of incoming foreign mail 

remains largely a manual process that relies primarily on physical 

examination. One courier is working with Customs to pilot test an 

advance manifest system, a computerized database that receives cargo 

manifest information. The database will allow Customs to analyze 

incoming package information and make more informed decisions about 

what packages to inspect. Since our work on international mail and 

containerized cargo processing involves information that Customs 

considers to be law enforcement sensitive, we are precluded from 

further discussing the challenges posed by mail and cargo processing in 

this unclassified report.



Although Customs has made some progress in implementing initiatives 

that are designed to improve the efficiency of its regulation of 

commercial activities, additional challenges remain, particularly in 

view of the new and heightened emphasis on terrorism. These challenges 

include (1) continuing to improve its evolving trade compliance program 

and (2) acquiring a new trade processing system.



Enhance Evolving Trade Compliance Program:



Tremendous growth in the volume and value of imports continues to 

create profound challenges for Customs to facilitate and enforce U.S. 

trade laws and regulations. The volume of trade is expected to more 

than double, up from $1 trillion in 1999 to surpassing $2 trillion in 

the year 2006. To speed the processing of imports and improve 

compliance with trade laws, Customs developed a strategy in response to 

the Customs Modernization and Informed Compliance Act of 1993 (also 

known as the ďMod ActĒ).[Footnote 24]



The Mod Act fundamentally altered the relationship between importers 

and Customs by giving the importer the legal responsibility for 

declaring the value, classification, and rate of duty applicable to 

merchandise being imported into the United States. Customs, however, is 

responsible for determining the final classification and value of the 

merchandise. The Mod Act also gave Customs and importers a shared 

responsibility for ensuring compliance with trade laws. To implement 

these new responsibilities, Customs developed an ďinformed compliance 

strategy.Ē:



In 1999, we reviewed Customsís informed compliance strategy and found 

that although Customs had monitored and evaluated certain aspects of 

the key initiatives--account management, compliance assessment, 

compliance measurement, and the informed and enforced compliance 

programs--it had not evaluated, nor did it have a plan to evaluate, the 

impact of the overall informed compliance strategy on compliance with 

trade laws.[Footnote 25] Consequently, we recommended that Customs 

develop and implement an evaluation of the effectiveness of its 

informed compliance strategy. Customs agreed with our recommendation 

and stated that it would study the effectiveness of the programís key 

initiatives.



Customsís Trade Compliance Strategy Study was completed on May 24, 

2001. It concluded that while the trade (informed) compliance strategy 

has evolved logically, it has some limitations. The study also provided 

several recommendations to address these findings. For example, the 

study indicated that the initiatives do improve compliance, but the 

impact on overall compliance rates is small. For example, the Company 

Enforced Compliance Process (CECP) was created to address the 

compliance problems of large importers whose noncompliance had a 

significant negative impact on the overall national compliance rates. 

According to the study, Customs was expected to punish noncomplying 

companies by imposing ďconfirmed riskĒ designations, increasing 

examinations, removing privileges, and referring for penalties. 

However, the confirmed risk status was only used six times and loss of 

privileges and referral for penalties were never used. The study 

concluded that CECP was not much of an enforced compliance process, and 

it was discontinued.



However, according to Customs, the lessons learned from the program are 

being incorporated into the next generation of compliance programs. On 

the other hand, the study found that the companiesí compliance rates 

increased after they participated in the compliance assessment and 

account management initiatives. While it is not possible to attribute 

the increase in compliance totally to these initiatives, the study 

concluded that these programs had a positive impact. In any event, not 

losing sight of the trade compliance program as the focus remains on 

terrorism will become part of the challenge that lies ahead.



Acquisition of New Trade System Remains Challenging:



Customsís ongoing effort to acquire a new trade processing system is 

key to modernizing how Customs tracks, controls, and processes all 

commercial goods imported into and exported out of the United States. 

This large and complex system, known as the Automated Commercial 

Environment (ACE), is expected to cost about $1.7 billion and is to 

replace Customsís antiquated system. Expected benefits from ACE include 

speeding the flow of legitimate commerce into and out of the United 

States, identifying and targeting high-risk commerce requiring greater 

scrutiny, and providing a single interface between the trade community 

and the federal government for trade data. In April 2001, Customs 

awarded a 5-year contract, with options to extend the contract to not 

more than 15 years, to a system integrator responsible for developing 

and deploying ACE.



Successfully managing a project as large and complex as ACE is a 

challenging undertaking. Over the last 4 years, we have reported on ACE 

and recommended steps Customs should take to minimize project risks, 

including incrementally justifying ACE investment, ensuring ACE 

alignment with Customsís enterprise architecture, having sufficient 

human capital resources, developing rigorous and analytically 

verifiable cost estimates, and employing effective software acquisition 

processes.[Footnote 26] To its credit, Customs has taken action to 

implement our recommendations, as follows:



* Incrementally justifying ACE investment. Customs defined and 

committed to implement process controls for justifying and making ACE 

investment decisions incrementally. For the first of four planned ACE 

increments, Customs followed its investment process, which included 

preparing cost and benefit expectations and determining that the 

expected return on investment is favorable. After implementing the 

first ACE increment, Customs plans to verify that actual costs and 

benefits meet expectations. Customs plans to continue this incremental 

investment approach for the three remaining ACE increments.



* Ensuring ACE alignment with Customsís enterprise architecture. 

Customs ensured that its enterprise architecture contained sufficient 

detail to build the first ACE release and has aligned the release with 

the enterprise architecture. Customs plans to continue to extend its 

enterprise architecture as necessary to build subsequent ACE releases.



* Having sufficient human capital resources. Customs developed and 

plans to implement a human capital management strategy for the Customs 

modernization office, which is responsible for managing the ACE 

acquisition. In its initial steps toward implementing this strategy, 

Customs increased the number of modernization office positions and 

raised the grade levels of other positions. Implementing this strategy 

is also expected to define the modernization officeís skill and 

capability needs and training and reward programs for each 

modernization office position.



* Developing rigorous and analytically verifiable cost estimating. 

Customs began developing and plans to implement a cost estimating 

program that employs the tenets of effective cost estimating as defined 

by the Software Engineering Institute (SEI).



* Employing effective software acquisition processes. Customs continues 

to make progress and has plans to establish effective software 

acquisition process controls, as embodied primarily in the second level 

of SEIís Software Acquisition Capability Maturity Model.[Footnote 27]



Customs has made progress in implementing some, but not all, of our 

recommendations. Moreover, because Customs is in the early stages of 

acquiring ACE, many challenging tasks remain before Customs will have 

implemented full ACE capability.



Achieve Sound Financial Management through Sustained Management 

Attention and Priority:



A key to Treasuryís ability to effectively carry out its mission both 

at the department level and as fiscal agent for the U.S. government is 

sound financial management, including preparing information about the 

governmentís finances that is routinely available, accurate, and 

reliable. Treasury faces many challenges in its ongoing efforts to 

improve the accuracy and reliability of its financial management 

systems and correct internal control weaknesses that we and the 

Treasury Office of Inspector General (OIG) identified at several of its 

bureaus and offices. Without accurate and reliable financial systems 

and information, as well as sound internal controls, Treasury cannot be 

sure that the information it has is sufficient to manage day-to-day 

operations, measure the results of agency and governmentwide 

operations, account for resources, collect taxes and other debts owed 

the government, or safeguard assets. Sustained attention and priority 

by top management will be required for Treasury to fully address its 

financial management challenges.



Treasury received unqualified opinions on its fiscal years 2002 and 

2001 departmentwide financial statements and for fiscal year 2002 

issued its financial statements 6 weeks after the end of the fiscal 

year. This was primarily a result of costly, resource-intensive efforts 

to overcome major financial management deficiencies at key bureaus--

most notably, IRS, as discussed earlier, and Customs. Compensating 

procedures have been used and certain significant business process 

changes have been made to produce materially accurate financial 

statements. Progress is being made in addressing underlying systemic 

issues, but these efforts are still several years away from achieving 

their intended outcomes. As a result, management continues to lack 

access to timely, reliable, and accurate information needed for day-to-

day decisions. Treasuryís ability to effectively fulfill its financial 

management responsibilities has also been adversely affected by the 

lack of substantial compliance with the financial management systems 

requirements detailed in FFMIA and weaknesses in Customsís internal 

controls over data in its automated systems.



Certain significant financial systems weaknesses, problems with 

fundamental record keeping and financial reporting, incomplete 

documentation, and weak internal controls, including computer controls, 

have prevented the U.S. government from obtaining an opinion on the 

reliability of its financial statements for the 5 years that we have 

reported on these statements. As preparer of these financial 

statements, FMS has a key responsibility to provide leadership and to 

work with agencies to address some of these problems, in particular, 

the lack of sufficient systems, controls, and procedures to properly 

prepare the governmentís financial statements. In performing much of 

Treasuryís role as primary fiscal agent for the federal government, FMS 

has made significant progress in addressing financial management issues 

related to implementing the requirements of the Debt Collection 

Improvement Act of 1996 (DCIA)[Footnote 28] and has taken actions to 

improve its computer security controls over systems used to help it 

process collections and disbursements made on behalf of the federal 

government. However, challenges remain to fully address these issues.



In 2001, we reported that periods of budget surplus posed challenges 

for Treasuryís debt management. At that time, surpluses were projected 

for the next decade, and Treasury was reducing debt held by the public. 

During fiscal year 2002, 4 consecutive years of surpluses in the 

unified budget of the federal government came to an end. With deficits 

projected to continue for at least the next few years, we no longer 

consider managing debt during large, sustained budget surpluses to be a 

challenge facing Treasury in the near term.



Resolve Financial Management Challenges Affecting Certain Bureausí 

Operations:



Treasury reported for fiscal years 2002 and 2001 that its financial 

management systems did not substantially comply with the requirements 

of FFMIA. In addition, we reported for fiscal year 2002 that IRS 

continued to experience significant ongoing deficiencies in its 

financial management and operational systems and processes. Further, 

Customs continued to face financial management problems, including 

weaknesses in its internal controls over data in its automated systems 

and developing and implementing new automated systems.



Bring Treasuryís Financial Management Systems into Compliance with 

FFMIA:



FFMIA requires auditors performing financial audits of Chief Financial 

Officers Act agencies to report whether the financial management 

systems substantially comply with federal accounting standards, federal 

financial management systems requirements, and the U.S. Standard 

General Ledger at the transaction level. For fiscal year 2002, the 

Treasury OIG reported that noncompliances were identified at IRS, FMS, 

Customs, and the U.S. Mint. Generally, the noncompliances involved 

financial systems that did not allow for reliably preparing certain 

financial statements and reports without extensive compensating 

procedures, general ledgers that did not conform with the U.S. Standard 

General Ledger, and weaknesses in computer security controls. Under 

FFMIA, we are required to report annually on agenciesí implementation 

of FFMIA by October 1 of each year. Thus, we will continue to monitor 

Treasuryís efforts to substantially comply with FFMIA.



Continue Work Resolving IRSís Financial Management Challenges:



As discussed in an earlier section of this report, IRS continues to 

experience significant deficiencies in its financial management and 

operational systems and processes. Nevertheless, in fiscal year 2002, 

for the third consecutive year, IRS produced financial statements 

covering its tax custodial and administrative activities that are 

fairly stated in all material respects. In addition, IRS was able to 

issue its fiscal year 2002 financial statements 6 weeks after the close 

of the fiscal year, whereas in previous years, IRS needed 5 months to 

issue these statements. IRSís success in fiscal year 2002 is attributed 

to the hard work and commitment of senior management and staff; 

significant changes in how the agency processed certain transactions, 

maintained its records, and reported its results; and continued 

refinements to compensating procedures used in prior years to produce 

the financial statements. Nevertheless, because of serious financial 

systems and control weaknesses, IRS had to rely extensively on costly, 

resource-intensive processes, statistical projections, external 

contractors, substantial adjustments, and monumental human efforts. 

While IRS has made significant progress, it continues to face many of 

the internal control weaknesses reported in previous years. In fiscal 

year 2002, the following five areas remained material weaknesses: 

(1) financial reporting, (2) unpaid tax assessments, (3) federal tax 

revenue and refunds, (4) property and equipment, and (5) computer 

security. We have provided IRS with detailed management and operational 

recommendations so that it can address these issues. IRS has laid the 

groundwork for sustainable improvements. Despite progress to date, 

resolving many of IRSís most serious problems will continue to require 

a sustained commitment from senior management.



Support Further Activity Strengthening Customsís Financial Management:



Customs continues to face financial management challenges, including 

weaknesses in internal controls over data in its automated systems, 

such as systems that are used to account for and manage Customsís 

collection activity. In addition, as discussed in an earlier section of 

this report, despite Customsís progress in implementing recommendations 

we have made over the past 4 years, numerous management weaknesses 

continue to hinder progress toward developing Customsís planned import 

system--ACE--which is intended to replace the current system used for 

collecting import-related data and ensuring, among other things, that 

trade-related revenue is properly collected and allocated. To ensure 

proper implementation of these initiatives, Customs management must 

continue to provide the necessary support.



Manage Multiple Challenges as Governmentís Fiscal Agent:



One of Treasuryís primary responsibilities is managing the federal 

governmentís finances. In fiscal year 2002, this massive and complex 

task included collecting more than $2.0 trillion in federal tax 

revenues, making federal payments totaling about $1.0 trillion, 

managing federal debt held by the public of about $3.6 trillion, 

performing central accounting functions, and providing debt management 

services to federal agencies. Treasuryís FMS is the governmentís 

financial manager, central disburser, and collections agency, as well 

as its accountant and reporter of financial information. Treasuryís 

Bureau of the Public Debt (BPD) is responsible for issuing Treasury 

securities and accounting for the resulting debt. For the 

6 years that we have audited BPDís Schedules of Federal Debt, we have 

rendered ďcleanĒ opinions on these schedules.



In performing much of Treasuryís role as primary fiscal agent for the 

federal government, FMS faces challenges in addressing financial 

management issues related to (1) preparing the U.S. governmentís 

financial statements, (2) fully implementing the requirements of DCIA, 

and

(3) improving the computer security controls over systems used to help 

process collections and disbursements made on behalf of most federal 

agencies. FMS has made important progress in each of these areas. 

However, it will take a significant and sustained commitment by FMS 

management to fully address the challenges that still remain.



Prepare Reliable Financial Statements:



In our audit report on the governmentís fiscal year 2001 financial 

statements, as in our audit reports for the previous 4 fiscal years, we 

reported certain significant financial systems weaknesses, problems 

with fundamental record keeping and financial reporting, incomplete 

documentation, and weak internal control, including computer controls. 

These deficiencies prevented the government from accurately reporting a 

significant portion of its assets, liabilities, and costs and prevented 

us from being able to form an opinion on the reliability of the 

governmentís financial statements. These deficiencies also affected the 

reliability of much of the related information in the U.S. governmentís 

Fiscal Year 2001 Financial Report and the underlying financial 

information. In addition, they affect the governmentís ability to 

accurately measure the full cost and financial performance of certain 

programs and effectively manage related operations. Many of these 

deficiencies will require significant efforts and commitment by key 

agencies. As preparer of the governmentís financial statements, FMS has 

a major responsibility to provide leadership and to work with agencies 

to address some of these problems, in particular, the lack of 

sufficient systems, controls, and procedures to properly prepare the 

governmentís financial statements. Such deficiencies hinder the 

governmentís ability to (1) properly balance the governmentís financial 

statements and account for billions of dollars of transactions between 

federal government entities (intragovernmental activity and balances), 

(2) properly and consistently compile the information in the financial 

statements, and (3) effectively reconcile the results of operations 

reported in the financial statements with budget results.



We are working with FMS, the Office of Management and Budget (OMB), and 

other key agencies to address these deficiencies. To help address 

certain issues that contributed to the out-of-balance condition for 

intragovernmental activity and balances, OMB has stated that it is 

implementing the recommendations included in a study conducted for the 

Joint Financial Management Improvement Program (JFMIP) in fiscal year 

2001. OMB has taken actions to address core problems in this area, 

including issuing governmentwide business rules for transactions among 

trading partners[Footnote 29] and requiring quarterly reconciliations 

of intragovernmental activity and balances beginning with the 3-month 

period ended December 31, 2002. Treasury is developing and plans to 

implement a new system and procedures to prepare the U.S. governmentís 

consolidated financial statements by fiscal year 2004. These actions 

are intended to, among other things, directly link information from 

agenciesí financial statements to amounts reported in the consolidated 

financial statements and facilitate the reconciliation of net position. 

However, correcting these problems is a significant challenge because 

of the governmentís size and complexity and the discipline needed to 

comply with accounting and reporting requirements. Meeting these 

challenges will require a significant commitment by agencies and FMS 

management combined with OMBís continued leadership as well as 

adequately trained staff and effective automated financial information 

management systems.



Continue Efforts to Fully Implement DCIA:



As the federal governmentís central debt collection agency, 

FMS[Footnote 30] provides debt management services to federal agencies 

for nontax debts more than 180 days delinquent that are required by 

DCIA to be referred for collection action. Nontax federal debt 

delinquent more than 180 days continues to be significant 

governmentwide; Treasury reported that it totaled $63.3 billion as of 

September 30, 2001, the last period for which certified data were 

available.[Footnote 31] Given the magnitude of this debt, it is 

critically important that all the debt collection provisions of DCIA be 

fully utilized to collect it. FMS has made significant progress in 

implementing key provisions of DCIA, and FMS officials now consider the 

agencyís debt collection program to be fully mature. Several key 

challenges remain. Most importantly, it will be critical for other 

federal agencies to make implementation of DCIA a priority, as these 

agenciesí efforts and cooperation will play an important role in FMSís 

ability to successfully meet its challenges.



FMS reported collecting more than $2.8 billion during fiscal year 

2002.[Footnote 32] Of this amount, about $1.2 billion was nontax 

federal debt, and offsetting tax refunds of delinquent debtors resulted 

in the vast majority of collections. FMSís successful merger of the Tax 

Refund Offset Program with the Treasury Offset Program (TOP) in 1999 

streamlined operations and involved system enhancements that 

contributed to significant increases in nontax debt collections from 

tax refund offsets. In addition, FMS began offsetting Social Security 

benefit payments in May 2001, which resulted in about $55 million in 

delinquent nontax debt collections for fiscal year 2002.



Building on the success FMS has experienced in offsetting tax refunds 

and its progress in bringing Social Security benefit payments into TOP, 

continued attention to nontax debt collections from federal salary 

payment offsets is warranted as they remain low. To increase such 

collections, FMS must be able to incorporate into TOP more federal 

salaries, including those from the Department of Veterans Affairs. In 

addition, nonsalary payments from numerous non-Treasury disbursing 

offices, including the Department of Defense and the U.S. Postal 

Service, still need to be added to TOP. Obtaining sustained commitment 

and cooperation from such agencies will be key to FMSís ability to 

bring more federal salaries and other payments into TOP. Key challenges 

for FMS include continuing to work with the agencies to identify those 

payments that are eligible to be offset and working to help ensure that 

the agencies have adequate systems in place to incorporate the payments 

into TOP.



In addition to the offset programs, Treasury operates the only 

governmentwide centralized debt collection center. This centralized 

collection function, known as cross-servicing, may involve the use of 

various debt collection tools, including private collection agencies 

(PCA) and administrative wage garnishment (AWG). According to FMS, 

agenciesí cross-servicing referrals have been steadily increasing and 

collections from cross-servicing have been increasing over the past 3 

fiscal years. To complement these positive trends, FMS still faces 

challenges in increasing the programís low collection rate. For 

example, FMS reports for September 2002 show that about $7.9 billion of 

debt was at the agency for cross-servicing and that FMSís debt 

management staff and PCAs collected about $67 million for fiscal year 

2002. Collections are challenging for FMS partly because the debts are 

often old when agencies refer them. In fiscal year 2000, we reported 

that about 46 percent of the debts that had been referred to FMS for 

cross-servicing during a period we reviewed were more than 4 years 

delinquent at the time of referral.[Footnote 33] In addition, in 

February 2002, we reported that FMSís own data showed that as of 

September 30, 2001, more than 50 percent of the debt referred for 

cross-servicing governmentwide was more than 2 years delinquent at the 

time of referral.[Footnote 34] We have emphasized that industry 

statistics have shown that the likelihood of recovering amounts owed 

decreased dramatically with the debtís age of delinquency. Clearly, to 

optimize its debt collection program, FMS faces challenges in getting 

agencies to refer eligible debts when they are over 

180 days delinquent, as required by DCIA and related Treasury 

regulations, or sooner whenever practicable.



In addition, FMSís job is becoming increasingly challenging as it is 

now getting debts from more than 40 federal agencies. According to FMS 

officials, certain recent referrals, such as Medicare Secondary Payer 

debts from the Department of Health and Human Services, involve 

complexities and issues that FMS debt collectors have not had to 

address in the past.



FMS is also faced with concerns about the accuracy, completeness, and 

validity of debts reported by agencies as eligible for and excluded 

from the DCIA cross-servicing provisions. Over the years, we have 

identified and reported on problems in this area. As of September 30, 

2001, the last period for which certified data were available, about 89 

percent of the total debt reported by the agencies as more than 180 

days delinquent was shown as excluded from cross-servicing.



It is important to note that in AWG, Congress gave agencies, including 

FMS, a powerful instrument for collecting debt or leveraging payment 

from delinquent debtors.[Footnote 35] FMS has recently incorporated AWG 

into its cross-servicing program. FMS views AWG as a collection tool of 

last resort and does not contemplate initiating its use in most cases 

until the debt has been with FMS for cross-servicing for at least 90 

days. As of August 2002, more than 6 years after the enactment of DCIA, 

only four agencies had authorized FMS to perform this important debt 

collection function on their behalf.



Going forward, it will be important for FMS to be able to incorporate 

more payments into its offset program. FMS will also need to determine 

whether its current cross-servicing strategy, which involves its own 

debt collectors and its PCA contractors, maximizes collections most 

cost-effectively through prompt use of all appropriate debt collection 

tools, including AWG. Therefore, we have previously recommended that 

FMS comprehensively review its cross-servicing process and also that 

FMS utilize AWG along with other debt collection tools.[Footnote 36] It 

will also be important for FMS to continue to seek the cooperation of 

OMB and the agenciesí OIGs to help ensure that eligible delinquent 

debts are identified and promptly referred by the agencies for cross-

servicing. In this regard, we have recommended that FMS work with OMB 

and the agenciesí OIGs to develop and implement a process for obtaining 

periodic independent verification of the accuracy, completeness, and 

validity of debts reported by agencies as eligible and excluded from 

DCIA cross-servicing provisions.[Footnote 37] FMS is currently 

addressing certain of these recommendations. FMS did not agree with all 

the specific aspects of our recommendations to comprehensively review 

its cross-servicing process or to use AWG in conjunction with other 

debt collection tools.



Strengthen FMSís Computer Security Controls:



FMS maintains multiple financial and information systems to help it 

process and reconcile moneys disbursed and collected by the various 

federal agencies. Our audit for fiscal year 2000 and previous years 

identified significant computer security control weaknesses at each of 

the FMS data centers. For fiscal years 2002 and 2001, the Treasury OIG 

continued to report computer security control weaknesses at FMS. FMS 

has made important progress in addressing its computer security control 

problems. However, weaknesses continued to exist at FMS primarily 

because it still lacks an effective, entitywide computer security 

management program. These weaknesses at FMS and its contractor data 

centers place billions of dollars of payments and collections at risk 

of loss or fraud. Sensitive data are at risk of inappropriate 

disclosure, and computer-based operations are at risk of disruption. 

The severity of these risks magnifies as FMS expands its networked 

environment through the migration of its financial applications from 

mainframes to client-server environments. Thus, as FMS provides users 

greater and easier access to larger amounts of data and system 

resources, well-designed and effective computer security controls are 

essential if FMSís operations and computer resources are to be properly 

protected.



We and the Treasury OIG have made numerous recommendations for 

improvements in FMSís computer security controls to help reduce the 

exposure to these risks. According to FMS officials, FMS has taken and 

will continue to take actions to correct the identified weaknesses. 

However, FMSís entitywide security control structure has yet to fully 

address the significant risks associated with its current and evolving 

computing environment. In response to our prior yearsí recommendation 

that FMS establish an effective security program, FMS has taken 

important steps, including revising and publishing information 

technology security policies and standards in June 2002. FMS stated 

that it has accelerated its plan to implement an entitywide security 

program and has appointed division information officers in each 

business area to provide the additional support needed to coordinate 

this effort. FMS has also appointed a senior executive to oversee audit 

findings, evaluate its entitywide security program using the Federal IT 

Security Assessment Framework, and implement a program plan and 

milestones to achieve a security program effectiveness of Level 3, 

Implemented Procedures and Controls.[Footnote 38] FMS stated that 

computer security remains one of its top priorities and that it is 

completely dedicated to fully implementing and maintaining an effective 

and robust security program. It will take a significant and sustained 

commitment by FMS management to fully address the computer security 

control weaknesses. We will follow up on these matters during our 

audits of the federal governmentís financial statements.



[End of section]



GAO Contacts:



[End of section]



Subjects covered in this report: Modernize IRS; * Improving service to 

taxpayers; * Collection of unpaid taxes; * Earned income credit 

noncompliance; * Establishing measures comparable over time and 

collecting sufficient performance data; Contact person: ; James R. 

White, Director; Tax Issues; (202) 512-8650; WhiteJ@GAO.Gov.



Subjects covered in this report: Modernize IRS; * Addressing financial 

management weaknesses to develop reliable cost-based performance 

information; Contact person: ; Steven J. Sebastian, Director; Financial 

Management and Assurance; (202) 512-3406; SebastianS@GAO.Gov.



Subjects covered in this report: Modernize IRS; * Managing the business 

systems modernization program; * Implementing effective computer 

security; Contact person: ; Robert F. Dacey, Director; Information 

Technology; (202) 512-3870; DaceyR@GAO.Gov.



Subjects covered in this report: Improve Customs Management; * Enhance 

evolving trade compliance program; Contact person: ; Laurie E. 

Ekstrand, Director; Justice Issues; (202) 512-8777; EkstrandL@GAO.Gov.



Subjects covered in this report: Improve Customs Management; * 

Acquisition of new trade system; Contact person: ; Randolph C. Hite, 

Director; Information Technology Architecture and Systems; (202) 512-

3870; HiteR@GAO.Gov.



Subjects covered in this report: Achieve Sound Financial Management; * 

Bring Treasuryís financial management systems into compliance with 

FFMIA; * Support further activity strengthening Customsís financial 

management; * Prepare reliable U.S. government financial statements; * 

Continue efforts to fully implement DCIA; * Strengthen FMSís computer 

security controls; Contact person: ; Gary T. Engel, Director; Financial 

Management and Assurance; (202) 512-3406; EngelG@GAO.Gov.



Subjects covered in this report: Achieve Sound Financial Management; * 

Continue work resolving IRSís financial management challenges; Contact 

person: ; Steven J. Sebastian, Director; Financial Management and 

Assurance; (202) 512-3406; SebastianS@GAO.Gov.



[End of table]





[End of section]



Related GAO Products:



[End of section]



IRS:



Internal Revenue Service: Status of Recommendations from Financial 

Audits and Related Financial Management Reports. GAO-02-848. 

Washington, D.C.: July 30, 2002.



Management Report: Improvements Needed in IRSís Accounting Procedures 

and Internal Controls. GAO-02-746R. Washington, D.C.: 

July 18, 2002.



Performance Management Systems: IRSís Systems for Frontline Employees 

and Managers Align with Strategic Goals but Improvements Can Be Made. 

GAO-02-804. Washington, D.C.: July 12, 2002.



IRSís Budget Justification: Options for Structure and Content. 

GAO-02-711R. Washington, D.C.: July 8, 2002.



Tax Administration: New Compliance Research Is on Track, but Important 

Work Remains. GAO-02-769. Washington, D.C.: June 27, 2002.



Tax Administration: Impact of Compliance and Collection Program 

Declines on Taxpayers. GAO-02-674. Washington, D.C.: May 22, 2002.



Tax Administration: Continued Progress Modernizing IRS Depends on 

Managing Risks. GAO-02-715T. Washington, D.C.: May 14, 2002.



Earned Income Credit: Opportunities to Make Recertification Program 

Less Confusing and More Consistent. GAO-02-449. Washington, D.C.: April 

25, 2002.



Tax Administration: IRS Continues to Face Management Challenges in Its 

Business Practices and Modernization Efforts. GAO-02-619T. Washington, 

D.C.: April 15, 2002.



Internal Revenue Service: Enhanced Efforts to Combat Abusive Tax 

Schemes--Challenges Remain. GAO-02-618T. Washington, D.C.: April 11, 

2002.



Internal Revenue Service: Assessment of Budget Request for Fiscal Year 

2003 and Interim Results of 2002 Tax Filing Season. GAO-02-580T. 

Washington, D.C.: April 9, 2002.



Business Systems Modernization: IRS Needs to Better Balance Management 

Capacity with System Acquisition Workload. GAO-02-356. Washington, 

D.C.: February 28, 2002.



Tax Administration: Assessment of IRSí 2001 Tax Filing Season. 

GAO-02-144. Washington, D.C.: December 21, 2001.



Earned Income Tax Credit Eligibility and Participation. GAO-02-290R. 

Washington, D.C.: December 14, 2001.



IRS Telephone Assistance: Limited Progress and Missed Opportunities to 

Analyze Performance in the 2001 Filing Season. GAO-02-212. Washington, 

D.C.: December 7, 2001.



Tax Administration: Millions of Dollars Could Be Collected If IRS 

Levied More Federal Payments. GAO-01-711. Washington, D.C.: July 20, 

2001.



Business Systems Modernization: Results of Review of IRSí March 2001 

Expenditure Plan. GAO-01-716. Washington, D.C.: June 29, 2001.



Tax Administration: Status of IRSí Efforts to Develop Measures of 

Voluntary Compliance. GAO-01-535. Washington, D.C.: June 18, 2001.



Business Systems Modernization: Results of Review of IRSí Customer 

Account Data Engine Project. GAO-01-717. Washington, D.C.: June 12, 

2001.



IRS Modernization: Continued Improvement in Management Capability 

Needed to Support Long-Term Transformation. GAO-01-700T. Washington, 

D.C.: May 8, 2001.



IRS Audit Rates: Rate for Individual Taxpayers Has Declined But Effect 

on Compliance Is Unknown. GAO-01-484. Washington, D.C.: April 25, 2001.



IRS Telephone Assistance: Quality of Service Mixed in the 2000 Filing 

Season and Below IRSí Long-Term Goal. GAO-01-189. Washington, D.C.: 

April 6, 2001.



Internal Revenue Service: Progress Continues But Serious Management 

Challenges Remain. GAO-01-562T. Washington, D.C.: April 2, 2001.



IRS Modernization: IRS Should Enhance Its Performance Management 

System. GAO-01-234. Washington, D.C.: February 23, 2001.



IRS Telephone Assistance: Opportunities to Improve Human Capital 

Management. GAO-01-144. Washington, D.C.: January 30, 2001.



Tax Systems Modernization: Results of Review of IRSí Third Expenditure 

Plan. GAO-01-227. Washington, D.C.: January 22, 2001.



Tax Systems Modernization: Results of Review of IRSí March 7, 2000, 

Expenditure Plan. GAO/AIMD-00-175. Washington, D.C.: May 24, 2000.



Customs:



Customs and INS: Information on Inspection, Infrastructure, Traffic 

Flow, and Security Matters at the Detroit Port of Entry. GAO-02-595R. 

Washington, D.C.: April 22, 2002.



U.S. Customs Service: Observations on Selected Operations and Program 

Issues. GAO-01-968T. Washington, D.C.: July 17, 2001.



Customs Service: The Self-Inspection Program Shows Promise but Remains 

a Work in Progress. GAO-01-676. Washington, D.C.: June 1, 2001.



Customs Service: Effects of Proposed Legislation on Officersí Pay. GAO-

01-304. Washington, D.C.: January 31, 2001.



Customs Service Modernization: Results of Review of First Automated 

Commercial Environment Expenditure Plan. GAO-01-696. Washington, D.C.: 

June 5, 2001.



Customs Service Modernization: Management Improvements Needed on High-

Risk Automated Commercial Environment Project. GAO-02-545. Washington, 

D.C.: May 13, 2002.



Customs Service Modernization: Third Expenditure Plan Meets Legislative 

Conditions, but Cost Estimating Improvements Needed. GAO-02-908. 

Washington, D.C.: August 9, 2002.



Financial Management:



Debt Collection Improvement Act of 1996: Major Data Sources Inadequate 

for Implementing the Debtor Bar Provision. GAO-02-462. Washington, 

D.C.: March 29, 2002.



Debt Collection Improvement Act of 1996: Status of Selected Agenciesí 

Implementation of Administrative Wage Garnishment. GAO-02-313. 

Washington, D.C.: February 28, 2002.



Debt Collection Improvement Act of 1996: Department of Agriculture 

Faces Challenges Implementing Certain Key Provisions. GAO-02-277T. 

Washington, D.C.: December 5, 2001.



Debt Collection Improvement Act of 1996: Agencies Face Challenges 

Implementing Certain Key Provisions. GAO-02-61T. Washington, D.C.: 

October 10, 2001.



Debt Management: Insights and Tools from Selected Nations. GAO-02-14. 

Washington, D.C.: November 21, 2001.



Federal Debt: Debt Management Actions and Future Challenges. 

GAO-01-317. Washington, D.C.: February 28, 2001.



U.S. Government Financial Statements: FY 2001 Results Highlight the 

Continuing Need to Accelerate Federal Financial Management Reform. GAO-

02-599T. Washington, D.C.: April 9, 2002.



Financial Management Service: Significant Weaknesses in Computer 

Controls Continue. GAO-02-317. Washington, D.C.: January 31, 2002.



Financial Audit: IRSís Fiscal Years 2002 and 2001 Financial Statements. 

GAO-03-243. Washington, D.C.: November 15, 2002.



Internal Revenue Service: Progress Made, but Further Actions Needed to 

Improve Financial Management. GAO-02-35. Washington, D.C.: October 19, 

2001. :



Financial Audit: Bureau of the Public Debtís Fiscal Years 2002 and 2001 

Schedules of Federal Debt. GAO-03-199. Washington, D.C.: November 1, 

2002.



[End of section]



Performance and Accountability and High-Risk Series:



[End of section]



Major Management Challenges and Program Risks: A Governmentwide 

Perspective. GAO-03-95.



Major Management Challenges and Program Risks: Department of 

Agriculture. GAO-03-96.



Major Management Challenges and Program Risks: Department of Commerce. 

GAO-03-97.



Major Management Challenges and Program Risks: Department of Defense. 

GAO-03-98.



Major Management Challenges and Program Risks: Department of Education. 

GAO-03-99.



Major Management Challenges and Program Risks: Department of Energy. 

GAO-03-100.



Major Management Challenges and Program Risks: Department of Health and 

Human Services. GAO-03-101.



Major Management Challenges and Program Risks: Department of Homeland 

Security. GAO-03-102.



Major Management Challenges and Program Risks: Department of Housing 

and Urban Development. GAO-03-103.



Major Management Challenges and Program Risks: Department of the 

Interior. GAO-03-104.



Major Management Challenges and Program Risks: Department of Justice. 

GAO-03-105.



Major Management Challenges and Program Risks: Department of Labor. 

GAO-03-106.



Major Management Challenges and Program Risks: Department of State. 

GAO-03-107.



Major Management Challenges and Program Risks: Department of 

Transportation. GAO-03-108.



Major Management Challenges and Program Risks: Department of the 

Treasury. GAO-03-109.



Major Management Challenges and Program Risks: Department of Veterans 

Affairs. GAO-03-110.



Major Management Challenges and Program Risks: U.S. Agency for 

International Development. GAO-03-111.



Major Management Challenges and Program Risks: Environmental Protection 

Agency. GAO-03-112.



Major Management Challenges and Program Risks: Federal Emergency 

Management Agency. GAO-03-113.



Major Management Challenges and Program Risks: National Aeronautics and 

Space Administration. GAO-03-114.



Major Management Challenges and Program Risks: Office of Personnel 

Management. GAO-03-115.



Major Management Challenges and Program Risks: Small Business 

Administration. GAO-03-116.



Major Management Challenges and Program Risks: Social Security 

Administration. GAO-03-117.



Major Management Challenges and Program Risks: U.S. Postal Service. 

GAO-03-118.



High-Risk Series: An Update. GAO-03-119.



High-Risk Series: Strategic Human Capital Management. GAO-03-120.



High-Risk Series: Protecting Information Systems Supporting the Federal 

Government and the Nationís Critical Infrastructures. 

GAO-03-121.



High-Risk Series: Federal Real Property. GAO-03-122.



FOOTNOTES



[1] Certain Treasury law enforcement activities, including those of 

Customs and the Secret Service, are transferring to the new Department 

of Homeland Security, which was created by the Homeland Security Act of 

2002, P.L. 107-296. In addition, ATF is transferring to the Department 

of Justice, with the exception of certain functions relating to the 

regulation and taxation of the alcohol and tobacco industries.



[2] U.S. General Accounting Office, Performance and Accountability 

Series: Major Management Challenges and Program Risks: Department of 

the Treasury, GAO-01-254 (Washington, D.C.: Jan. 2001).



[3] We also removed the high-risk designation of Justiceís and 

Treasuryís asset forfeiture programs, as discussed in our 2003 High-

Risk Series: An Update, GAO-03-119.



[4] Total unpaid taxes due the government include (1) delinquent taxes 

that IRS is attempting to collect, (2) taxes that IRS knows are due but 

it has decided not to pursue collecting, and (3) an unknown amount of 

unpaid taxes that IRS has not identified.



[5] Known unpaid taxes consist of (1) taxes due from taxpayers for 

which IRS can support the existence of a receivable through taxpayer 

agreement or a favorable court ruling (federal taxes receivable); (2) 

compliance assessments, in which neither the taxpayer nor the court has 

affirmed that the amounts are owed; and (3) write-offs, which represent 

unpaid assessments for which IRS does not expect further collections 

due to such factors as the taxpayerís death, bankruptcy, or insolvency. 

The $112 billion represents only the first two categories.



[6] Internal Revenue Service: Statement of Charles O. Rossotti before 

the Annual RRAí98 Joint Hearing on IRS Progress Convened by the Joint 

Committee on Taxation (IRS Doc 2002-11707, May 14, 2002).



[7] U.S. General Accounting Office, Financial Audit: IRSís Fiscal Years 

2002 and 2001 Financial Statements, GAO-03-243 (Washington, D.C.: Nov. 

15, 2002).



[8] IRS estimated that $1.2 billion would be recovered as a result of 

enforcement efforts.



[9] U.S. General Accounting Office, Information on Payroll Taxes and 

Earned Income Tax Credit Noncompliance, GAO-01-487T (Washington, D.C.: 

Mar. 7, 2001).



[10] U.S. General Accounting Office, Earned Income Tax Credit 

Eligibility and Participation, GAO-02-290R (Washington, D.C.: Dec. 14, 

2001).



[11] GAO-03-243.



[12] P.L. 104-208.



[13] P.L. 105-206.



[14] U.S. General Accounting Office, Tax Systems Modernization: 

Management and Technical Weaknesses Must Be Corrected If Modernization 

Is to Succeed, GAO/AIMD-95-156 (Washington, D.C.: July 26, 1995) and 

Tax Systems Modernization: Blueprint Is a Good Start but Not Yet 

Sufficiently Complete to Build or Acquire Systems, GAO/AIMD/GGD-98-54 

(Washington, D.C.: Feb. 24, 1998).



[15] U.S. General Accounting Office, High-Risk Series: An Overview, 

GAO/HR-95-1 (Washington, D.C.: February 1995).



[16] GAO-01-254.



[17] U.S. General Accounting Office, Business Systems Modernization: 

IRS Needs to Better Balance Management Capacity with Systems 

Acquisition Workload, GAO-02-356 (Washington, D.C.: Feb. 28, 2002).



[18] U.S. General Accounting Office, Business Systems Modernization: 

Results of Review of IRSí March 2001 Expenditure Plan, GAO-01-716 

(Washington, D.C.: June 29, 2001).



[19] GAO-02-356.



[20] U.S. General Accounting Office, Financial Audit: IRSís Fiscal Year 

2002 and 2001 Financial Statements, GAO-03-243 (Washington, D.C.: Nov. 

15, 2002).



[21] A material weakness is a condition that precludes the agencyís 

internal controls from providing reasonable assurance that material 

misstatements in the financial statements would be prevented or 

detected on a timely basis.



[22] Conveyances include aircraft, trucks, trains, buses, privately 

owned vehicles, and ocean vessels.



[23] GAO-01-254.



[24] P. L. 103-182, title VI.



[25] U.S. General Accounting Office, Customs Service Modernization: 

Impact of New Trade Compliance Strategy Needs to Be Assessed, GAO/GGD-

00-23 (Washington, D.C.: 

Dec. 15, 1999).



[26] U.S. General Accounting Office, Customs Service Modernization: 

Third Expenditure Plan Meets Legislative Conditions, but Cost 

Estimating Improvements Needed,

GAO-02-908 (Washington, D.C.: Aug. 9, 2002); Customs Service 

Modernization: Management Improvements Needed on High-Risk Automated 

Commercial Environment Project, GAO-02-545 (Washington, D.C.: May 13, 

2002); Customs Service Modernization: Results of Review of First 

Automated Commercial Environment Expenditure Plan,

GAO-01-696 (Washington, D.C.: June 5, 2001); and Customs Service 

Modernization: Serious Management and Technical Weaknesses Must Be 

Corrected, GAO/AIMD-99-41 (Washington, D.C.: Feb. 26, 1999).



[27] Capability Maturity ModelSM is a service mark of Carnegie Mellon 

University, and CMM is registered in the U.S. Patent and Trademark 

Office. The SA-CMM identifies key process areas that are necessary to 

effectively manage software-intensive system acquisitions. Achieving 

the second level of the SA-CMMís five-level scale means that an 

organization has the software acquisition rigor and discipline to 

repeat project successes.



[28] P.L. 104-134.



[29] Trading partners are U.S. government agencies, departments, or 

other components included in the U.S. governmentís consolidated 

financial statements that do business with each other.



[30] The Secretary of the Treasury assigned FMS primary responsibility 

to fulfill Treasuryís debt collection responsibilities under DCIA.



[31] This amount includes debts that were written off by certain 

agencies for accounting purposes but that agencies are still attempting 

to collect. It also includes only debts less than 10 years delinquent.



[32] In addition to delinquent nontax federal debt, FMS collects child 

support obligations and state income tax debt on behalf of states and 

tax levies for IRS. FMS reported collecting more than $1.6 billion of 

such debt for states and IRS during fiscal year 2002.



[33]  U.S. General Accounting Office, Debt Collection: Treasury Faces 

Challenges in Implementing Its Cross-Servicing Initiative, GAO/AIMD-

00-234 (Washington, D.C.: Aug. 4, 2000).



[34] U.S. General Accounting Office, Debt Collection Improvement Act of 

1996: Status of Selected Agenciesí Implementation of Administrative 

Wage Garnishment, GAO-02-313 (Washington, D.C.: Feb. 28, 2002).



[35] Certain debt collection experts have emphasized that the mere 

threat of using AWG is often enough to motivate people to pay their 

delinquent debts.



[36] GAO/AIMD-00-234 and GAO-02-313.



[37] GAO/AIMD-00-234.



[38]  The Framework provides a method for agency officials to (1) 

determine the current status of their security programs relative to the 

existing policy and (2) where necessary, establish a target for 

improvement. The Framework identifies five levels of security 

effectiveness: Level 1, Documented Policy; Level 2, Documented 

Procedures; Level 3, Implemented Procedures and Controls; Level 4, 

Tested and Reviewed Procedures and Controls; and Level 5, Fully 

Integrated Procedures and Controls.



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