Financial Management:

IRS Does Not Adequately Manage Its Operating Funds

AIMD-94-33: Published: Feb 9, 1994. Publicly Released: Feb 9, 1994.

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GAO reviewed the Internal Revenue Service's (IRS) management of its $6.7 billion in fiscal year (FY) 1992 appropriated operating funds, focusing on whether IRS: (1) managed and expended operating funds in accordance with the limitations and purposes specified by Congress; and (2) properly reported its expenditures.

GAO found that: (1) only the IRS national office and central region use the Automated Financial System (AFS), while six other regions use the outdated Automated Accounting and Budget Execution System (AABES); (2) IRS systems cannot provide current information on available appropriations; (3) IRS does not promptly record expenditures against appropriations, resolve differences between its own records and Treasury balances, or review and adjust obligations to appropriate amounts; (4) IRS does not have adequate systems and controls to ensure proper approval and entry of journal vouchers; (5) IRS lacks controls for ensuring the proper approval and documentation of payments to vendors, resulting in duplicate payments and overpayments; (6) IRS has frequently made late or unnecessarily early payments to vendors, and underpaid interest due on late payments; (7) IRS has not integrated its payment and procurement systems and does not reconcile data to identify duplicate payments or overpayments; (8) IRS cannot reasonably ensure that AABES general ledger balances are complete and accurate and cannot resolve differences between detailed spending information and summary records; (9) IRS systems do not identify the budget category for expenditures; (10) IRS reported FY 1992 obligations by management activity rather than budget activity; and (11) IRS relies on managers' informal records to satisfy reporting requirements for information system costs.

Recommendations for Executive Action

  1. Status: Closed - Not Implemented

    Comments: IRS' corrective actions taken have not fully addressed the problems with its fund balance with Treasury reconciliations. IRS, with the assistance of a contractor, was able to reconcile its fund balance with Treasury accounts to Treasury records in FY1996. However, in FY 1998, IRS did not reconcile its fund balance with Treasury accounts. Thus, it is evident that IRS has not built reconciliations of fund balance with Treasury into its monthly procedures. GAO is closing this recommendation and replacing it with a new recommendation (see GAO/AIMD-99-196) to highlight the need for action.

    Recommendation: The Commissioner of Internal Revenue should direct the Chief Financial Officer to strengthen controls over IRS operating funds by promptly resolving differences between IRS and Treasury records of IRS cash balances and adjusting accounts accordingly.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  2. Status: Closed - Not Implemented

    Comments: IRS' corrective actions taken, such as establishing guidelines for posting and clearing amounts in the suspense accounts on a regular basis, did not fully address the weakness. At the end of FY1998, significant amounts remained in suspense accounts and as a result, were not posted to the appropriate appropriation accounts. GAO is closing this recommendation and replacing it with a new one (see GAO/AIMD-99-196) to highlight the need for action.

    Recommendation: The Commissioner of Internal Revenue should direct the Chief Financial Officer to strengthen controls over IRS operating funds by promptly investigating and recording suspense account items to appropriate appropriation accounts.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  3. Status: Closed - Not Implemented

    Comments: GAO closed this recommendation and replaced it with one addressed to IRS' CFO, emphasizing the need to periodically analyze outstanding obligations and deobligate those no longer needed (see GAO-01-42). In fiscal year 2000, GAO confirmed that IRS analyzed its obligations and deobligated those no longer needed.

    Recommendation: The Commissioner of Internal Revenue should direct the Chief Financial Officer to strengthen controls over IRS operating funds by performing periodic reviews of obligations, adjusting the records for obligations to amounts expected to be paid, and removing expired appropriation balances from IRS records as stipulated by the National Defense Authorization Act for Fiscal Year 1991.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  4. Status: Closed - Implemented

    Comments: IRS stated that, with the implementation of AFS at the beginning of fiscal year 1993, procedures were established Service-wide that journal vouchers had to be approved by a supervisor, a second-level supervisor, and the Office of Financial Systems before processing. The review performed by the Office of Financial Systems was to include verifying the accuracy and appropriateness of data entry. During GAO's fiscal year 1993-1995 audits, however, GAO found that these reviews were not effective and that a significant number of transactions had been processed that were in error. IRS further strengthened controls by performing managerial reviews of information. GAO's testing of IRS' fund balance with Treasury as of September 30, 1996, did not reveal significant posting errors, which indicates that the reviews were effective.

    Recommendation: The Commissioner of Internal Revenue should direct the Chief Financial Officer to strengthen controls over IRS operating funds by monitoring compliance with IRS policies requiring approval of journal vouchers and enforcing controls intended to preclude data entry errors.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  5. Status: Closed - Implemented

    Comments: During fiscal year 1994, IRS was implementing commitment accounting Service-wide, which will systematically verify the coding on procurement transactions and place primary responsibility for accurate coding on the plan managers. Commitment accounting will require that plan managers initiate all procurement transactions online. Validity tables in AFS will verify the acceptability of the account coding entered but will not ensure that the coding accurately reflects the transaction entered. Plan managers will be responsible for reviewing and reconciling expenditure reports to their source documents. Also, the Chief Financial Officer will provide instructions to plan managers, procurement offices, and accounting offices to follow established guidelines for coding and reviewing procurement transactions.

    Recommendation: The Commissioner of Internal Revenue should direct the Chief Financial Officer to strengthen controls over IRS operating funds by reviewing procurement transactions to ensure that accounting information assigned to these transactions accurately reflects the appropriate fiscal year, appropriation, activity, and subobject class.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  6. Status: Closed - Implemented

    Comments: Detailed written guidance on processing and approving payment transactions was provided to accounting offices, and training for all personnel responsible for processing and approving payments was provided during the summer of 1992. Written guidance on vendor credits was completed during fiscal year 1995.

    Recommendation: The Commissioner of Internal Revenue should direct the Chief Financial Officer to develop and implement internal controls to ensure that IRS payments are proper and timely by providing: (1) detailed written guidance for all payment transactions, including unusual items such as vendor credits; and (2) training to all personnel responsible for processing and approving payments.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  7. Status: Closed - Implemented

    Comments: Prompt payment quality control reviews are being done quarterly to look for matching of documents. Reviews of filed documents, as part of the Annual Business Review process, are done to determine if they are being retained for 2 years.

    Recommendation: The Commissioner of Internal Revenue should direct the Chief Financial Officer to develop and implement internal controls to ensure that IRS payments are proper and timely by revising procedures to require that vendor invoices, procurement orders, and receipt and acceptance documentation be matched prior to payment and that these documents be retained for 2 years.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  8. Status: Closed - Implemented

    Comments: IRS issued a receipt and acceptance guidance in May 1998, provided training, and issued a memorandum reminding executives of their responsibilities for receipt and acceptance.

    Recommendation: The Commissioner of Internal Revenue should direct the Chief Financial Officer to develop and implement internal controls to ensure that IRS payments are proper and timely by revising procedures to incorporate the requirements that accurate receipt and acceptance data on invoiced items be obtained prior to payment and that supervisors ensure that these procedures are carried out.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  9. Status: Closed - Implemented

    Comments: IRS implemented procedures to disseminate automatic notices to requisitioners and approvers reminding them to timely input receiving reports after the anticipated due dates for goods or services ordered had passed.

    Recommendation: The Commissioner of Internal Revenue should direct the Chief Financial Officer to develop and implement internal controls to ensure that IRS payments are proper and timely by revising document control procedures to require IRS units that actually receive goods and services to promptly forward receiving reports to payment offices so that payments can be promptly processed.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  10. Status: Closed - Implemented

    Comments: IRS revised the interest rate computation to correspond with guidance provided by the Department of the Treasury. Further, the quarterly Prompt Payment reviews and quality reviews are being used to continuously determine if interest is computed correctly.

    Recommendation: The Commissioner of Internal Revenue should direct the Chief Financial Officer to develop and implement internal controls to ensure that IRS payments are proper and timely by monitoring manually computed interest on late payments to determine whether interest is accurately computed and paid.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  11. Status: Closed - Implemented

    Comments: IRS is developing a policy to determine what level of authority is needed for early payment approval.

    Recommendation: The Commissioner of Internal Revenue should direct the Chief Financial Officer to develop and implement internal controls to ensure that IRS payments are proper and timely by enforcing existing requirements that early payments be approved in accordance with Office of Management and Budget (OMB) Circular A-125.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  12. Status: Closed - Not Implemented

    Comments: Due to the impending implementation of a new procurement system in fiscal year 1998, IRS elected not to develop manual reconciliation procedures. The procurement system is now fully integrated with AFS.

    Recommendation: The Commissioner of Internal Revenue should direct the Chief Financial Officer to develop and implement internal controls to ensure that IRS payments are proper and timely by requiring payment and procurement personnel, until the integration of AFS and the procurement system is completed as planned, to periodically (monthly or quarterly) reconcile payment information maintained in AFS to amounts in the procurement records and promptly resolve noted discrepancies.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  13. Status: Closed - Implemented

    Comments: AFS has been enhanced to help prevent overpayments by clarifying the error-override message that appears on the system and requiring a manager's approval to continue processing the transaction. Also, although AFS cannot prevent the use of multiple vendor codes, it was stressed to Regional Accounting Chiefs that they were to have one vendor file coordinator and that they were to keep control over the files so as to avoid multiple vendor codes. IRS management stated that it believed that the requirement to include descriptions and periods of service, in fields available (but not mandatory) in AFS, to help prevent and detect improper payments would not be practical.

    Recommendation: The Commissioner of Internal Revenue should direct the Chief Financial Officer to develop and implement internal controls to ensure that IRS payments are proper and timely by requiring the description and period of service for all invoiced items to be input in AFS by personnel responsible for processing payments, and enhance the edit and validity checks in AFS to help prevent and detect improper payments.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  14. Status: Closed - Implemented

    Comments: In formulating the fiscal year 1995 IRS budget, CFO developed and implemented a revised budget structure which eliminates the need for prorations. This revised budget structure keeps many features of the current budget structure, but, by establishing direct relationships between Management Activities (MACs) and Budget Activities (BACs), it allows the Service to develop reliable data on budgeted and actual costs. A critical feature of the revised budget structure is the direct assignment of training and direct support costs to functional MACs. Additionally, with the creation of new BACs for Field Resources Management, IRS has eliminated the requirement to needlessly prorate support costs. OMB approved the revised budget structure in December 1993 and was approved by Congress with the passage of the FY1994 budget.

    Recommendation: The Commissioner of Internal Revenue should direct the Chief Financial Officer to establish procedures, based on budget categories approved by OMB, to develop reliable data on budget and actual costs.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  15. Status: Closed - Implemented

    Comments: On October 1, 1992, the implementation of AFS was completed for all regions. AFS was also made available to financial plan managers. At the beginning of the year, the Budget Division entered financial plan data into AFS quarterly apportionments. If a quarterly apportionment is exceeded, AFS prevents further expenditures until the additional resources are provided by Budget. Also, IRS introduced commitment accounting into AFS, first on a limited basis. This control feature will improve information on availability of funds.

    Recommendation: The Commissioner of Internal Revenue should direct the Chief Financial Officer to strengthen controls over IRS operating funds by monitoring whether AFS effectively provides managers up-to-date information on available budget authority.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  16. Status: Closed - Not Implemented

    Comments: This recommendation is being closed in lieu of an updated recommendation contained in the report on IRS' fiscal year 1999 internal controls (GAO-01-42, appendix II recommendation 91).

    Recommendation: The Commissioner of Internal Revenue should direct the Chief Financial Officer to use AFS enhanced cost accumulation capabilities to monitor and report costs by project in all appropriations.

    Agency Affected: Department of the Treasury: Internal Revenue Service

 

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