Financial Audit:

IRS Significantly Overstated Its Accounts Receivable Balance

AFMD-93-42: Published: May 6, 1993. Publicly Released: May 6, 1993.

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Pursuant to a legislative requirement, GAO reviewed the Internal Revenue Service's (IRS) accounts receivable, focusing on: (1) the validity of IRS-reported accounts receivable balance as of June 30, 1991, and the potential effect of related accounting improvement efforts; and (2) the IRS methodology for calculating its allowance for doubtful accounts.

GAO found that: (1) only about three-fifths of the IRS accounts receivable balance was valid because of duplicate and inadequately supported assessments of enforcement actions and collection activities; (2) IRS has emphasized supporting enforcement actions and monitoring assessments for collection rather than financial management, which has resulted in inaccurate reports; (3) unreliable IRS accounts receivable may hamper IRS operations; (4) IRS automated systems are outdated, inefficient, unintegrated, and unreliable; (5) IRS has several accounting system improvement efforts under way to reduce erroneous assessments, but those efforts neglect financial reporting; (6) the IRS Chief Financial Officer (CFO) does not have control of revenue accounting or the authority to ensure that IRS systems provide needed data; (7) CFO can help ensure the availability of needed data by overseeing the design of financial management systems; (8) the IRS methodology for estimating collectibility is not reliable because it includes invalid receivables, relies on collection experience rather than collection risk, and does not consider taxpayers' ability to pay; (9) IRS needs to consider individual accounts as well as group accounts for analysis; and (10) the lack of reliable data hampers IRS ability to collect valid assessments and evaluate the effectiveness of its collection efforts.

Recommendations for Executive Action

  1. Status: Closed - Not Implemented

    Comments: IRS has implemented a statistical sampling method for assessing the collectibility of its receivables. However, GAO is also making additional recommendations to further address this problem.

    Recommendation: The Commissioner of Internal Revenue should direct CFO to modify the IRS methodology for assessing the collectibility of its receivables by considering current and forecast economic conditions, as well as historical collection data, in analyses of groups of assessments.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  2. Status: Closed - Not Implemented

    Comments: IRS has implemented a statistical sampling method for assessing the collectibility of its receivables. However, GAO is also making additional recommendations to further address this problem.

    Recommendation: The Commissioner of Internal Revenue should direct CFO to modify the IRS methodology for assessing the collectibility of its receivables by basing group analyses on categories of assessments with similar collection risk characteristics.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  3. Status: Closed - Implemented

    Comments: IRS has taken action to modify the calculation of its accounts receivable methodology. For the September 30, 1993, balance, IRS took a statistical sample of 3,220 receivables and individually determined the collectibility of each receivable. IRS then projected the results to the universe.

    Recommendation: The Commissioner of Internal Revenue should direct CFO to modify the IRS methodology for assessing the collectibility of its receivables by including an analysis of individual taxpayer accounts to assess their ability to pay.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  4. Status: Closed - Implemented

    Comments: Although IRS has not developed written procedures for assessing the collectibility of its receivables, it followed the methodology that GAO recommended in the report and reported an estimate of valid receivables of $71 billion and collectible receivables of $29 billion in its September 30, 1993, financial statements.

    Recommendation: The Commissioner of Internal Revenue should direct CFO to modify the IRS methodology for assessing the collectibility of its receivables by eliminating, from the gross receivables balance, assessments determined to have no chance of being collected.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  5. Status: Closed - Implemented

    Comments: Although IRS has not developed written procedures for assessing the collectibility of its receivables, it followed the methodology that GAO recommended in the report and reported an estimate of valid receivables of $71 billion and collectible receivables of $29 billion in its September 30, 1993, financial statements.

    Recommendation: The Commissioner of Internal Revenue should direct CFO to modify the IRS methodology for assessing the collectibility of its receivables by including only valid accounts receivables in the analysis.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  6. Status: Closed - Implemented

    Comments: The CFO is fully involved in developing performance measures for accounts receivable.

    Recommendation: The Commissioner of Internal Revenue should clearly designate CFO as the official responsible for coordinating the development of performance measures related to receivables and for ensuring that IRS financial reports conform with applicable accounting standards.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  7. Status: Closed - Implemented

    Comments: For financial reporting purposes, IRS has developed and implemented a statistical sampling method that will determine those unpaid assessments that represent taxes receivable. However, GAO has made additional recommendations to further address this problem.

    Recommendation: The Commissioner of Internal Revenue should direct CFO to take steps to ensure the accuracy of the balances reported in IRS financial statements. In the long term, this will require modifying IRS systems so that they are capable of: (1) identifying which assessments currently recorded in the Master File System represent valid receivables; and (2) designating new assessments that should be included in the receivables balance as they are recorded. Until these capabilities are implemented, IRS should rely on statistical sampling to determine what portion of its assessments represent valid receivables.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  8. Status: Closed - Implemented

    Comments: The CFO is responsible for approving systems development efforts related to revenue accounting.

    Recommendation: The Commissioner of Internal Revenue should provide the IRS CFO authority to ensure that IRS accounting system development efforts meet its financial reporting needs. At a minimum, CFO approval of related system designs should be required.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  9. Status: Closed - Implemented

    Comments: IRS has implemented a statistical sampling method for assessing the collectibility of its receivables. However, GAO is also making additional recommendations to further address this problem.

    Recommendation: Once the appropriate data are accumulated, IRS may use modeling to analyze collectibility of accounts on a group basis, in addition to separately analyzing individual accounts. Such modeling should consider factors that are essential for estimating the level of losses, such as historical loss experience, recent economic events, and current and forecast economic conditions. In the meantime, statistical sampling should be used as the basis for both individual and group analyses.

    Agency Affected: Department of the Treasury: Internal Revenue Service

 

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