Management Report: Improvements Are Needed to Enhance the Internal Revenue Service's Internal Control over Financial Reporting
Fast Facts
During our FY 2019 financial statement audit of the IRS, we found 4 new internal control issues.
For example, when taxpayers’ payments go to IRS, employees prepare the deposits and couriers take them to the bank. When the couriers were unable to work, managers transported the money. But the same managers were also overseeing the preparation of those deposits—increasing the risk of theft.
As another example, IRS didn’t follow its procedures for calculating future payments on its leased office spaces—increasing the risk that these figures could be misstated in its financial statements.
We made recommendations to address the issues we found.
A sign that reads Internal Revenue Service Building
Highlights
What GAO Found
During its audit of the Internal Revenue Service's (IRS) fiscal years 2019 and 2018 financial statements, GAO identified new control deficiencies in IRS's internal control over financial reporting that although not considered a material weakness or significant deficiency, nonetheless warrant IRS management's attention. These control deficiencies concern IRS's
- transporting taxpayer receipts,
- reviewing taxpayers' accounts for duplicate refunds,
- recording acceptance of goods and services, and
- calculating future lease payments for non-cancellable operating leases.
GAO communicated to IRS management detailed information regarding these four new control deficiencies and made four recommendations to address them. In addition, for 11 of the 37 recommendations from GAO's prior reports related to control deficiencies in IRS's internal control over financial reporting, GAO found that IRS implemented corrective actions during fiscal year 2019 that resolved the related control deficiencies, and as a result, these recommendations were closed. Therefore, IRS currently has 30 GAO recommendations to address—the previous 26 open recommendations and the four new recommendations GAO is making in this report. GAO is making four recommendations to address the new control deficiencies identified during its audit. These recommendations are intended to improve IRS's internal controls over financial reporting as well as to bring IRS into conformance with its own policies and Standards for Internal Control in the Federal Government. In commenting on a draft of this report, IRS stated that it is committed to implementing appropriate improvements to ensure that it maintains sound financial management practices. IRS agreed with GAO's four new recommendations and described planned actions to address each recommendation.
Why GAO Did This Study
The purpose of this report is to present those internal control deficiencies identified during GAO's audit of IRS's fiscal years 2019 and 2018 financial statements for which GAO did not already have any recommendations outstanding. This report provides new recommendations to address these internal control deficiencies. This report also includes the results of GAO's follow-up on the status, as of September 30, 2019, of IRS's corrective actions taken to address recommendations contained in GAO's prior years' reports that remained open as of September 30, 2018.
Recommendations
GAO is making four recommendations to address the new control deficiencies identified during its audit. These recommendations are intended to improve IRS’s internal controls over financial reporting as well as to bring IRS into conformance with its own policies and Standards for Internal Control in the Federal Government. In commenting on a draft of this report, IRS stated that it is committed to implementing appropriate improvements to ensure that it maintains sound financial management practices. IRS agreed with GAO’s four new recommendations and described planned actions to address each recommendation.
Recommendations for Executive Action
| Agency Affected | Recommendation | Status |
|---|---|---|
| Internal Revenue Service | We recommend that the Commissioner of Internal Revenue update and implement policies and procedures for developing a courier contingency plan to prohibit managers responsible for overseeing the preparation of taxpayer receipts for deposits from also transporting them to financial institutions. (Recommendation 20-01) |
Closed – Implemented
In fiscal year 2020, IRS updated the Internal Revenue Manual (IRM) to prohibit any management official listed in the courier contingency plan as being responsible for delivering taxpayer receipts for deposit from assisting or overseeing the preparation of the daily deposit package, when operating under the courier contingency plan. In fiscal year 2021, IRS updated the IRM to enhance the clarity of these requirements. During our testing in fiscal year 2021, we reviewed the courier contingency plans for two Submissions Processing Centers and found no exceptions related to this control. As a result, we concluded that IRS's corrective actions as of September 30, 2021, were adequate to close this recommendation.
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| Internal Revenue Service | We recommend that the Commissioner of Internal Revenue establish and implement manual refund procedures to direct (1) initiators to document (e.g., record on the taxpayers' accounts or annotate on the related manual refund forms) the justification for bypassing the IAT tool warning related to potential duplicate tax refunds on taxpayers' accounts and (2) managers to monitor whether such warnings were bypassed and review the justifications for reasonableness prior to approving manual refund forms. (Recommendation 20-02) |
Open
During our fiscal year 2022 audit, IRS officials told us that they plan to address this recommendation in the future. As a result, this recommendation remains open as of September 30, 2022.
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| Internal Revenue Service | We recommend that the Commissioner of Internal Revenue establish and implement actions to provide reasonable assurance that business units record the acceptance of goods and services in a timely manner in accordance with IRS policies and procedures. (Recommendation 20-03) |
Closed – Implemented
In fiscal year 2021, IRS developed processes that (1) send earlier notification of invoices to receivers through system-generated emails; (2) improve invoice tracking, notifications, and management oversight related to timely R&A; (3) send executives an additional quarterly notice that addresses significant failures to perform timely recording of R&A; and (4) verify that staff have the proper system access when new commercial contracts are awarded. During our fiscal year 2022 audit, we found that IRS developed and implemented (1) a system-generated email for R&A notifications of new IPP invoices that have interfaced with IFS; (2) a system-generated goods acceptance report that includes all R&A entries from the prior day; (3) an additional quarterly notice to executives that addresses significant failures to perform timely recording of R&A, which will provide an opportunity to remediate the issues; and (4) processes and procedures to verify that the EU and COR have proper system access when new commercial contracts are awarded. As a result, we concluded that IRS's corrective actions as of September 30, 2022, were adequate to close this recommendation.
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| Internal Revenue Service | We recommend that the Commissioner of Internal Revenue establish and implement actions to provide reasonable assurance that the future lease payment amounts for non-cancellable operating leases are calculated correctly. (Recommendation 20-04) |
Closed – Implemented
The IRS agreed with this recommendation, and in fiscal year 2020 the Chief Financial Officer organization implemented updated policies and procedures to include additional instructions needed to calculate the future lease payments due on the non-cancelable leases with terms greater than one year and also created an automated calculation to determine the number of remaining months of lease payments. IRS's actions sufficiently address our recommendation.
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