Internal Revenue Service:

Immediate and Long-Term Actions Needed to Improve Financial Management

AIMD-99-16: Published: Oct 30, 1998. Publicly Released: Oct 30, 1998.

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Pursuant to a legislative requirement, GAO provided information on the Internal Revenue Service's (IRS) internal controls and financial management systems.

GAO noted that: (1) IRS' internal control system remains plagued by weaknesses that adversely affect the agency's ability to safeguard assets from material loss, ensure material compliance with relevant laws and regulations, and ensure that material misstatements do not occur in its financial statements; (2) left uncorrected, these weaknesses significantly increase the risk that future financial statements of both IRS and the entire federal government as well as other IRS reports may not be reliable and that losses to the government could occur; (3) IRS' general ledger cannot distinguish categories of unpaid assessments to determine the portion that represents actual taxes receivable of the federal government; (4) IRS also does not have a detailed listing, or subsidiary ledger, for tracking and accumulating unpaid assessments; (5) these weaknesses resulted in tens of billions of dollars in adjustments to correct misclassifications and eliminate duplicate transactions; (6) IRS also continues to lack adequate documentation to support its unpaid assessments; (7) controls over service center cash and checks received directly from taxpayers are not sufficient to adequately reduce the exposure to loss; (8) between 1995 and 1997, IRS identified $5.3 million in actual or alleged embezzlement by service center employees; (9) some refunds should not have been issued and some refunds were issued for incorrect amounts in fiscal year (FY) 1997; (10) control deficiencies also make IRS vulnerable to issuing duplicate refunds to the same person; (11) IRS is unable to determine the specific amount of revenue it collects for three of the federal government's four largest revenue sources at time of collection because it does not obtain the information necessary to do so; (12) during FY 1997, IRS did not distribute excise tax receipts to the relevant trust funds based on collections as required by the Internal Revenue Code; (13) IRS officials have indicated that they implemented a method in June 1998 for certifying excise tax distributions based on collections; (14) IRS' general ledger cannot routinely generate reliable and timely financial information; (15) as a result, in FY 1997 IRS' systems did not comply with the Federal Management Improvement Act of 1996; and (16) these weaknesses illustrate the extent to which IRS still has extensive work ahead of it to fully address and resolve its internal control and financial management system deficiencies.

Status Legend:

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  • Review Pending-GAO has not yet assessed implementation status.
  • Open-Actions to satisfy the intent of the recommendation have not been taken or are being planned, or actions that partially satisfy the intent of the recommendation have been taken.
  • Closed-implemented-Actions that satisfy the intent of the recommendation have been taken.
  • Closed-not implemented-While the intent of the recommendation has not been satisfied, time or circumstances have rendered the recommendation invalid.
    • Review Pending
    • Open
    • Closed - implemented
    • Closed - not implemented

    Recommendations for Executive Action

    Recommendation: To better ensure that IRS can prepare timely, reliable financial statements, IRS should improve the accuracy of its master file extraction programs used to classify unpaid assessments so that once the extractions are made, any subsequent adjustments needed would not be material. At a minimum, IRS should consider the nature of the adjustments made to the FY 1997 amounts extracted and adjust the extraction programs in future years accordingly.

    Agency Affected: Department of the Treasury: Internal Revenue Service

    Status: Closed - Implemented

    Comments: Because IRS's general ledger does not contain the detail necessary to support the individual transactions that make up the balances in its financial statements, IRS must use specialized computer programs to extract information from its master files--its only detailed database of taxpayer information. However, the amounts produced by this approach require material audit adjustments to produce reliable financial statements. IRS made programming changes in fiscal year (FY) 1998, which enabled it to extract data that was consistent with FY 1997 final reported balances. However, its FY 1998 unpaid assessment balances still required significant audit adjustments to correct misstated and duplicate unpaid assessment balances. Nonetheless, due to inherent weaknesses in this process, further refinement of the master file extraction programs will not significantly reduce these adjustments.

    Recommendation: To address its longstanding deficiencies with respect to documentary support for its unpaid assessments, IRS should establish minimum documentation standards or checklists for its collection files. These standards or checklists should include minimum documentation and file organization requirements for all receivable and compliance assessment cases, specifying the types of documentation required, standard file organization, and the retention period that will ensure such documents are maintained until the statute of limitations for collection has expired.

    Agency Affected: Department of the Treasury: Internal Revenue Service

    Status: Closed - Implemented

    Comments: GAO noted substantial improvement in IRS's ability to locate and provide adequate supporting documentation for unpaid assessments. During the fiscal year 2000 audit, unpaid assessment cases reviewed by GAO generally contained sufficient detailed information to determine the appropriate classification and provide a basis for estimating collectibility for cases determined to be taxes receivable.

    Recommendation: To address the system deficiencies affecting IRS' ability to effectively manage and report on its unpaid assessments, the Commissioner of Internal Revenue should ensure that IRS' modernization blueprint include plans to develop a subsidiary ledger to accurately and timely identify, classify, track, and report all IRS unpaid assessments by amount and taxpayer. This subsidiary ledger must also have the capability to distinguish unpaid assessments by category in order to identify those assessments that represent taxes receivable versus compliance assessments and write-offs. In cases involving trust fund recovery penalties, the subsidiary ledger should ensure that: (1) the trust fund recovery penalty assessment is appropriately tracked for all taxpayers liable, but counted only once for reporting purposes; and (2) all payments made are properly credited to the accounts of all individuals assessed for the liability.

    Agency Affected: Department of the Treasury: Internal Revenue Service

    Status: Closed - Not Implemented

    Comments: Closed. IRS has established CDDB to function as a transaction-level subsidiary ledger for unpaid tax debt. While CDDB has the capability to function as a subsidiary ledger for unpaid tax debt, systemic limitations and errors in taxpayer accounts prevent IRS from using CDDB as its subsidiary ledger to routinely and reliably report its balance of unpaid tax assessments. IRS must continue to use a labor-intensive, manual compensating process to estimate the year-end balances of the various categories of unpaid tax assessments to avoid materially misstating its financial statements. While IRS has made significant progress, full operational capability of CDDB depends on additional refinements to CDDB programs that classify unpaid assessments accounts into the various financial reporting categories, as well as IRS's ability to improve controls over the recording of information into taxpayer accounts. Additionally, GAO continues to find deficiencies in IRS's processes for accurately and timely crediting the accounts of all parties assessed for a TFRP. Nevertheless, in order to provide recommendations more closely aligned with the current status of these control weaknesses, GAO closed this recommendation based on IRS's progress. GAO reported the remaining issues related to the reliability of IRS's subsidiary ledger and trust fund recovery penalties, along with new recommendations for corrective actions, in a June 2010 management report. See GAO-10-656R - recommendations 10-03 and 10-04.

    Recommendation: To reduce IRS' vulnerabilities in its receipt processing activities, the Commissioner of Internal Revenue should examine and consider options to increase deterrent controls at service centers. Some options IRS should examine and consider include: (1) installing surveillance cameras to monitor staff when they are opening, extracting and sorting the mail, and when they are processing receipts; (2) restricting personal items that can be brought into the receipt processing areas, such as handbags, briefcases, and bulky outerwear; and (3) providing lockers and requiring their use for storing personal belongings outside of the receipt processing areas.

    Agency Affected: Department of the Treasury: Internal Revenue Service

    Status: Closed - Implemented

    Comments: During its fiscal year 2001 audit, GAO verified that IRS examined and considered options to increase deterrent controls at service centers, and that IRS installed lockers at the service centers GAO visited. However, GAO noted that issues continue to exist in the implementation of the policy prohibiting employees from bringing personal belongings into receipt processing areas. GAO will continue to evaluate the effectiveness of IRS's efforts during its fiscal year 2002 financial audit.

    Recommendation: To limit the number of checks overlooked by the extraction staff and thus inadvertently routed to units outside of the Receipt and Control Branch, IRS should provide adequate training and monitoring of extraction unit staff to ensure staff are informed and properly trained on the necessary procedures, and that the procedures are being followed.

    Agency Affected: Department of the Treasury: Internal Revenue Service

    Status: Closed - Implemented

    Comments: GAO confirmed that IRS service centers provided training to extraction staff.

    Recommendation: To reduce the cash and checks that may be forwarded to units outside the Receipt and Control Branch, IRS should limit the units that may receive unopened mail directly to only those units which require confidentiality due to the nature of their work, such as the Inspections unit. At a minimum, mail addressed to off-site locations should be routed through the service center first to identify mail that may contain taxpayer receipts.

    Agency Affected: Department of the Treasury: Internal Revenue Service

    Status: Closed - Implemented

    Comments: IRS issued a policy to route mail through the service centers' receipt and control function beginning January 1, 1999, except for functions that require confidentiality, due to the nature of their work. It also issued revised procedures on January 1, 2000. GAO confirmed that almost all mail, with a few exceptions consistent with the new policy, was routed through the Mail Unit.

    Recommendation: To further reduce the exposure of taxpayer cash or checks to loss or theft, IRS should ensure that security guards and other unauthorized service center personnel do not receive walk-in payments from taxpayers.

    Agency Affected: Department of the Treasury: Internal Revenue Service

    Status: Closed - Implemented

    Comments: IRS issued a December 1998 memorandum, prohibiting guards and other unauthorized personnel from receiving payments and specifying procedures for deposit unit personnel to receive such payments from taxpayers. During subsequent audit work, GAO did not observe security guards receiving taxpayer receipts. However, GAO made an additional recommendation in report GAO/AIMD-99-193 to further reduce the vulnerability of walk-in payments.

    Recommendation: To address the problem of inappropriate refund payments, the Commissioner of Internal Revenue should conduct a cost-benefit study to evaluate whether preventive controls, such as manually comparing W-2 information to both paper and electronically filed tax returns at the time returns are received rather than many months later, would be cost beneficial. This study should include a complete analysis of the projected costs and associated benefits of increases to preventive controls over the issuance of refunds. If such controls are determined to be beneficial, IRS should implement them to the extent practical to reduce the amount of inappropriate refund payments.

    Agency Affected: Department of the Treasury: Internal Revenue Service

    Status: Closed - Not Implemented

    Comments: Since this recommendation was originally issued in 1998 (GAO/AIMD-99-16), IRS has formulated a different approach to this issue, and GAO has formulated an alternative recommendation.

    Recommendation: As part of a longer term solution to preventing improper refund payments, the Commissioner of Internal Revenue should ensure that IRS' systems modernization plan includes the capability to compare W-2 and other third party information to both paper and electronically filed tax returns as they are processed to prevent improper refunds from being issued.

    Agency Affected: Department of the Treasury: Internal Revenue Service

    Status: Closed - Implemented

    Comments: IRS's modernization blueprint provides for the comparison of returns against data available prior to refund issuance.

    Recommendation: To improve the accuracy of the information on unpaid assessments contained in the master files, IRS should manually review and eliminate duplicate or other assessments that have already been paid. This would ensure that all accounts related to a single assessment are appropriately credited for payments received.

    Agency Affected: Department of the Treasury: Internal Revenue Service

    Status: Open

    Comments: IRS continues to take corrective actions to address the underlying cause for inaccurate taxpayer account balances caused by not appropriately crediting Trust Fund Recovery Penalty (TFRP) payments to all parties. However, IRS's own testing as well as our testing during fiscal year 2012 continued to find errors and delays in recording and crediting TFRP payments to all related parties, resulting in inaccurate account balances in IRS's systems. By October 2014, IRS plans to complete additional actions to ensure that all accounts related to a single assessment are appropriately credited for payments received.

    Recommendation: To address the weaknesses identified in IRS' general ledger system, the Commissioner of Internal Revenue should implement Phase 0 of its overall systems modernization plan as quickly as possible. In doing so, IRS should incorporate plans to ensure that the resulting system can routinely generate timely and reliable financial management reports which can be used by internal and external users and which will increase the timeliness of preparation and audit of its annual financial statements. Until Phase 0 is implemented, IRS should continue to utilize special computer programs and prepare manual adjustments, as needed, to derive amounts to be reported in the financial statements.

    Agency Affected: Department of the Treasury: Internal Revenue Service

    Status: Closed - Not Implemented

    Comments: Phase 0 of the systems modernization plan has been superseded by a data warehouse which IRS believes will produce timely and reliable financial information with full traceability. The development of this data warehouse, known as the Customer Account Data Engine (CADE), have recently undergone significant additional changes, and the latest version of CADE is not scheduled for full implementation for several years. Until then, current procedures for extracting, reconciling, and reporting financial data will continue to be used. As Phase 0 was superseded, GAO closed this recommendation as not implemented.

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