Financial Audit:

Examination of IRS' Fiscal Year 1993 Financial Statements

AIMD-94-120: Published: Jun 15, 1994. Publicly Released: Jun 15, 1994.

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Pursuant to a legislative requirement, GAO examined the Internal Revenue Service's (IRS) financial statements for fiscal year (FY) 1993.

GAO found that: (1) critical supporting information for IRS financial statements was not available; (2) the available information was generally unreliable due to ineffective internal controls; (3) IRS internal controls did not effectively safeguard assets, provide a reasonable basis for determining material compliance with laws and regulations, or ensure that there were no material misstatements in the financial statements; and (4) although there were no instances of material noncompliance with laws and regulations during FY 1993, there were instances of noncompliance with certain Internal Revenue Code provisions.

Recommendations for Executive Action

  1. Status: Closed - Not Implemented

    Comments: The CFO continues to refine the Enforcement Revenue Information System (ERIS). ERIS integrates data from enforcement revenue recommendations, assessments, collections, cost, and case length based on closed case information. In addition, IRS is developing plans to build a database on all accounts of the operational inventory. Each module will be evaluated to assess the degree of collectibility, compliance, and validity. In January 1999, IRS reported that it is continuing refinement of ERIS. Although IRS has not fully addressed all of the identified problems, GAO has since made several more specific recommendations in AIMD-99-16 and AIMD-99-17 to address IRS' ongoing need for more timely and accurate information related to its efforts. Therefore, GAO is closing this recommendation.

    Recommendation: The Commissioner of Internal Revenue should direct the Chief Financial Officer (CFO) to ensure that system development efforts provide reliable, complete, timely, and comprehensive information with which to evaluate the effectiveness of its enforcement and collection programs.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  2. Status: Closed - Not Implemented

    Comments: IRS is developing a database on all accounts of the operational inventory. Each module will be evaluated to assess the degree of collectibility, compliance and validity, as well as provide a complete list of variables contributing to abatements by transaction code. In January 1999, IRS reported it had implemented program changes to more accurately report on abatements. GAO's FY1998 audit noted several issues related to abatements; however these issues were not deemed significant internal control weaknesses. GAO is reporting these issues separately to IRS in a management letter. While GAO continues to find issues related to IRS accounting for abatements, the existing recommendation does not address the issues GAO has identified. Consequently, GAO is closing this recommendation.

    Recommendation: The Commissioner of Internal Revenue should direct the Chief Financial Officer to establish and implement procedures to analyze the impact of abatements on the effectiveness of assessments from IRS' various collection programs.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  3. Status: Closed - Implemented

    Comments: IRS reconciled its fiscal year 1997 Master Files to the general ledger and reduced the amount of unexplained differences to an immaterial level. This allowed GAO to audit the detailed transactions.

    Recommendation: The Commissioner of Internal Revenue should direct the Chief Financial Officer to reconcile detailed revenue transactions for individual taxpayers to the master file and general ledger.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  4. Status: Closed - Implemented

    Comments: IRS has made improvements in this area which allowed it to receive an unqualified opinion for the first time on its fiscal year 1997 Financial Statements. While GAO is closing this recommendation, it has made several new and more specific recommendations to address this issue.

    Recommendation: The Commissioner of Internal Revenue should direct the Chief of Taxpayer Services to establish and implement procedures to proactively identify errors that occur during processing of data, and design and implement improved systems and controls to prevent or detect such errors in the future.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  5. Status: Closed - Implemented

    Comments: IRS is implementing its written corrective action plan. This action plan is updated regularly and is used to monitor its systems and controls to identify problems as they occur. It establishes clear lines of responsibility and tracks the status of corrective actions to address these problems.

    Recommendation: The Commissioner of Internal Revenue should direct the Chief Financial Officer to establish, for the CFO organization, a method to monitor its systems and controls to regularly identify problems as they occur by establishing clear lines of responsibility and communication from top management to the lowest staff levels.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  6. Status: Closed - Implemented

    Comments: IRS developed its written corrective action plan and is implementing these corrective actions.

    Recommendation: The Commissioner of Internal Revenue should direct the Chief Financial Officer to establish, for the CFO organization, a method to develop action plans that are agreed upon by all affected groups and individuals to correct problems identified.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  7. Status: Closed - Not Implemented

    Comments: IRS' corrective action plans have not resolved previously reported deficiencies. Since the areas of deficiency vary widely, GAO is closing this recommendation and will evaluate IRS' monitoring and corrective actions taken individually on specific recommendations.

    Recommendation: The Commissioner of Internal Revenue should direct the Chief Financial Officer to establish, for the CFO organization, a method to continuously monitor corrective actions to ensure that progress is achieved.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  8. Status: Closed - Not Implemented

    Comments: IRS and GAO mutually agreed to close this recommendation because the account does not impact the auditability of the IRS's Financial Statements.

    Recommendation: The Commissioner of Internal Revenue should direct the Chief Financial Officer to develop and implement systems and standard operating procedures that incorporate controls to ensure that seized asset inventory records are accurately maintained, which include: (1) establishing specific procedures to ensure the prompt and accurate recording of seizures and disposals, including guidance addressing the valuation of seized assets; (2) reconciling accounting and inventory records monthly as an interim measure until the successful integration of inventory and accounting systems is completed; and (3) implementing mechanisms for ensuring that annual physical inventories at field locations are effectively performed, that discrepancies are properly resolved, and that inventory records are appropriately adjusted.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  9. Status: Closed - Implemented

    Comments: The CFO, together with Collections and Criminal Investigations staff, agreed to follow Federal Accounting Standards Advisory Board guidance and Joint Financial Management Improvement Program core requirements for systems as a framework for developing and reporting required financial management information.

    Recommendation: The Commissioner of Internal Revenue should direct the Chief Financial Officer to determine what information related to seized assets, such as proceeds and liens and other encumbrances, would be most useful to IRS managers for financial management purposes and develop a means for accounting for these data.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  10. Status: Closed - Implemented

    Comments: IRS started doing quarterly comparison of personnel and payroll data.

    Recommendation: The Commissioner of Internal Revenue should direct the Chief Financial Officer to periodically compare information in payroll records to supporting personnel information.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  11. Status: Closed - Not Implemented

    Comments: IRS incorporated the Tax Systems Modernization Project into its overall system modernization and thus, the recommendation is no longer applicable. Consequently, GAO has closed this recommendation and replaced it with one recommending that IRS establish a system to capture all costs related to its efforts to modernize IRS' systems (see GAO-01-42).

    Recommendation: The Commissioner of Internal Revenue should direct the Chief Financial Officer to use current information to periodically update estimated future tax system modernization costs.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  12. Status: Closed - Not Implemented

    Comments: This recommendation was intended as more of an overview than a recommendation.

    Recommendation: In the short term, IRS management should implement and monitor basic control procedures, such as reconciliations and supervisory approval, to ensure that cash and other assets are properly managed and accounted for. These steps must be taken before meaningful information can be obtained to assist IRS, Treasury, the Office of Management and Budget, and Congress in making informed decisions. IRS must also implement long-term actions to address remaining weaknesses.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  13. Status: Closed - Not Implemented

    Comments: IRS' support of its accounts payable balance continues to be inadequate. Insufficient evidence about the reliability of accounts payable was one of the factors that contributed to GAO issuing a qualified opinion on IRS' balance sheet. To assist IRS in addressing this problem, GAO is making two more specific recommendations in the follow-up report to the audit of IRS' fiscal year 1998 financial statements. Therefore, GAO is closing this recommendation.

    Recommendation: The Commissioner of Internal Revenue should direct the Chief Financial Officer to develop reliable detailed information supporting its reported accounts payable balances.

    Agency Affected: Department of the Treasury: Internal Revenue Service

 

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