Internal Revenue Service:

Serious Weaknesses Impact Ability to Report on and Manage Operations

AIMD-99-196: Published: Aug 9, 1999. Publicly Released: Aug 9, 1999.

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GAO followed up on its report on the Internal Revenue Service's (IRS) fiscal year (FY) 1998 financial statements.

GAO noted that: (1) significant financial management system limitations and internal control weaknesses prevented IRS from reliably reporting on the results of its administrative activities for FY 1998 and from having reliable financial information for managing its operations; (2) these deficiencies are long-standing, many being reported in GAO's first financial audit of IRS for FY 1992; (3) in FY 1998, IRS did not reconcile its administrative fund balance with Treasury accounts; (4) without performing these reconciliations, IRS has no assurance that it is properly controlling and reporting its appropriated funds; (5) IRS did not promptly record certain types of expenditures against appropriation; (6) IRS' records show a net of $141 million in its suspense account at the end of FY 1998 that had not been applied to a specific IRS appropriation; (7) according to IRS' records, the absolute value of items in the suspense account related to FY 1989 through FY 1998 totalled $238 million for government accounts and $170 million for nongovernment accounts with net values of $74 million and $67 million, respectively; (8) until all these transactions are posted to the proper appropriation accounts and matched with corresponding obligational records, the agency cannot ensure that the activities recorded in these accounts are proper IRS transactions and that its outstanding obligations and disbursements do not exceed appropriated amounts; (9) IRS' systems were unable to generate detailed subsidiary records of its accounts payable and outstanding obligations; (10) in part this was due to IRS not having adequate transaction-level detail to match related transactions; (11) the lack of subsidiary records for key account balances affects IRS' ability to provide meaningful and reliable financial information needed to effectively report on and manage its operations; (12) IRS' property and equipment (P&E) was likely materially understated due to a number of deficiencies in its recording of P&E; (13) IRS' financial statements do not reflect the significant assets that IRS had purchased as part of tax system modernization; (14) additionally, IRS' detailed records do not accurately keep track of additions and deletions of P&E; (15) IRS did not have adequate review procedures to oversee and manage the accounting and financial reporting process; and (16) IRS has acknowledged these weaknesses and plans to improve its financial data for its administrative accounts.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: In fiscal year 2000, IRS substantially reduced the amount and duration of transactions held in suspense compared to prior years. At fiscal year-end, GAO found no material transactions in the suspense account that were older than 1 year.

    Recommendation: The Commissioner of Internal Revenue should direct the Chief Financial Officer to strengthen control over IRS' operating funds by promptly investigating and clearing suspense account items. For example, outstanding amounts in the suspense account should be reviewed every month to try to resolve and clear outstanding balances.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  2. Status: Closed - Implemented

    Comments: In fiscal year 2000, IRS provided the listings stated, although errors were still noted. For example, the listing of non-payroll operating expenses also erroneously included some property items. GAO closed this recommendation because of IRS's ability to generate these listings, but tracked the reliability of these listings and the implementation of subsidiary ledgers in another recommendation issued after the results of its audit of IRS's fiscal year 1999 financial statements (see GAO-01-42). IRS subsequently addressed these other issues and the related recommendation was also closed.

    Recommendation: To effectively manage and report on key balances, the Commissioner of Internal Revenue should direct the Chief Financial Officer to develop subsidiary records for accounts payable and undelivered orders and a list of current year nonpayroll operating expenses that will provide reliable accounts payable, undelivered orders, and nonpayroll operating expense data. This could include adding an indicator code when inputting transactions into the accounting system that will let IRS identify and eliminate offsetting transactions. In the long-term, it could include enhancements to IRS' financial systems to include the capability of routinely generating subsidiary records of outstanding accounts payable and undelivered order balances and a reliable list of current year nonpayroll operating expenses.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  3. Status: Closed - Implemented

    Comments: IRS has taken several actions to address this recommendation and improve its cost accounting capability. For example, in fiscal year 2007, IRS developed and issued its first cost accounting policy to provide guidance on the concepts and requirements for managerial cost accounting within IRS. In addition, in fiscal year 2008, IRS (1) established an Office of Cost Accounting within its CFO, (2) completed several cost pilots to demonstrate its capability to use the cost data within IFS and the associated workload and production data from its business unit systems to calculate the full costs of its products, services, and programs, and (3) completed development of the return on investment for the Earned Income Tax Credit program that includes full cost information. However, IRS has not extended the cost pilot methodology to develop full cost information on the full range of IRS's programs. Nevertheless, to provide recommendations more closely aligned with the current status, GAO has closed this recommendation based on IRS's progress to date and has reported the remaining issues, along with related recommendations for corrective action, in a June 2009 Management Report. See report GAO-09-513R.

    Recommendation: The Commissioner of Internal Revenue should direct the Chief Financial Officer to develop the data to support meaningful cost information categories and cost-based performance measures.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  4. Status: Closed - Implemented

    Comments: During fiscal year 2003, IRS implemented several remedies. Specifically, IRS developed procedures to use electronic data from vendors to create skeletal inventory records, developed and implemented a policy and procedures for updating inventory records for disposals, expanded use of network monitoring software to track assets, and enhanced monitoring and quality control over the annual inventory process. During fiscal year 2003, GAO noted significant improvement in the reliability of IRS's property and equipment inventory records.

    Recommendation: The IRS should develop and implement procedures and controls to ensure that detailed P&E records are accurately maintained. These procedures and controls would include ensuring that physical inventories at field locations are effectively performed, including prompt resolution of discrepancies found in the inventories and appropriate adjustment of detailed records.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  5. Status: Closed - Implemented

    Comments: GAO confirmed that annual physical inventories are now being performed. However, because of long-standing problems with its overall property system, IRS still cannot ensure the accuracy of its detailed records. GAO will continue to monitor the accuracy of IRS's property and equipment records under a related recommendation in GAO/AIMD-99-196.

    Recommendation: Because of inaccuracies in existing detailed P&E records and in order to provide an accurate starting point, the Commissioner of Internal Revenue should consider directing that a physical inventory of P&E be performed with adjustments being made to IRS' detailed records accordingly. To ensure that such efforts are not wasted, IRS first needs to establish and implement effective procedures to ensure that the accuracy of detailed P&E records, once corrected, is maintained.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  6. Status: Closed - Implemented

    Comments: IRS developed and implemented interim procedures to determine year-end balances for its P&E accounts until its new integrated financial system is implemented, currently targeted for March 2005.

    Recommendation: In conjunction with or shortly after a physical inventory, the Commissioner of Internal Revenue should direct that a systematic validation of the P&E amounts (valuation) for items in IRS' detailed records be performed.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  7. Status: Closed - Implemented

    Comments: IRS implemented an interim process for reporting the full cost of P&E at fiscal year-end until its integrated financial system is implemented. GAO is continuing to track IRS's efforts to implement the new integrated financial system under a related recommendation in this report.

    Recommendation: To address the likely understatement of reported P&E and improve the accuracy of information contained in the P&E records, the Commissioner of Internal Revenue should direct the Chief Financial Officer to develop a means to capture and capitalize all costs incurred to bring P&E to a form and location suitable for its intended use in accordance with Statement of Federal Financial Accounting Standards Number 6, including the design and installation costs and the costs of externally developed software.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  8. Status: Closed - Implemented

    Comments: Since 1999, IRS has continued to make improvements toward addressing this recommendation through the implementation of various IRS systems. In 1999, IRS implemented the Automated Financial System (AFS) whereby all transactions were posted to expense accounts at a detailed level and then reclassified to asset accounts at a summary level. In October 2004, IRS implemented the Integrated Financial System (IFS) in which IRS posts directly to its asset accounts. Additionally, IRS maintains detailed records of asset purchases with current year asset and expense database files. We confirmed that over the years, IRS has improved its financial systems so that IRS records P&E and capital leases when purchased and it maintains detailed P&E records. However, our Financial Statement audits continue to find that these property records do not always reconcile to the financial records. In order to provide a recommendation more closely aligned with the current status of the remaining issues to be resolved, we are closing this recommendation based on IRS's progress to date and have reported the remaining issue, along with a related recommendation for corrective action in our June 2011 management report (see recommendation no. 11-26 in report GAO-11-536).

    Recommendation: In the long-term, to address the system deficiencies affecting IRS' ability to effectively manage and report on its P&E balances, the Commissioner of Internal Revenue should direct that enhancements be made to IRS' financial systems to include recording P&E and capital leases as assets when purchased and to generate detailed records for P&E that reconcile to the financial records.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  9. Status: Closed - Implemented

    Comments: Hiring and training has been completed for additional staff to work on financial statement preparation, and accounting and financial functions. GAO confirmed that individuals have been hired and put in place to develop IRS's financial statements and to perform accounting and financial functions.

    Recommendation: IRS can improve its financial reporting process by ensuring that appropriate supervisory and management review of its financial statements and operations occurs. The Commissioner of Internal Revenue should direct that additional knowledgeable staff are employed or that existing staff are appropriately cross-trained to be able to develop IRS' financial statements and perform its accounting and financial functions or are able to perform the necessary supervision needed to obtain reliable and supportable financial data on time.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  10. Status: Closed - Implemented

    Comments: IRS developed an evaluation process to include two levels of management review in the CFO organization. While GAO identified errors and omissions in the draft fiscal year 2001 financial statements, indicating IRS's actions not been effectively implemented, in later audits, GAO found that the evaluation process improved the form, content, and reliability of drafts of IRS's financial statements.

    Recommendation: To address IRS' deficiencies in its accounting and financial reporting processes, the Commissioner of Internal Revenue should direct the Chief Financial Officer to establish procedures for the financial statements to undergo review at the appropriate levels within the Chief Financial Officer's office, with documented evidence of the reviews.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  11. Status: Closed - Implemented

    Comments: IRS's Chief Financial Officer issued a policy announcement that documented capitalization guidance for P&E.

    Recommendation: To address the likely understatement of reported P&E and improve the accuracy of information contained in the P&E records, the Commissioner of Internal Revenue should direct the Chief Financial Officer to revise the capitalization policy to ensure that material P&E acquisitions are not expensed.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  12. Status: Closed - Implemented

    Comments: IRS reported that it established a system in fiscal year 2000 to provide management oversight to assure that appropriation account balances are reconciled each month. GAO confirmed that IRS successfully implemented policies and procedures to promptly identify differences between IRS and Treasury records of IRS's appropriation account balances, and to appropriately resolve identified differences.

    Recommendation: The Commissioner of Internal Revenue should direct the Chief Financial Officer to ensure that IRS promptly resolves differences between IRS and Treasury records of IRS' appropriation account balances and adjusts accounts accordingly. For example, reconciliations should be performed promptly every month, with Treasury and IRS amounts in agreement and reconciling items properly resolved.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  13. Status: Closed - Implemented

    Comments: IRS reported that contracting officers are required to notify the CFO's office of all new lease acquisitions with total payments in excess of $50,000, so that the CFO's office can determine whether they represent capital leases. IRS also reported that in November 2000, the CFO's office completed reviewing documentation for all leased assets acquired in fiscal year 2000. However, GAO found that IRS hired a contractor to review the lease agreements, and that IRS continued to lack a systematic process to ensure that capital leases are properly identified and recorded.

    Recommendation: To address the likely understatement of reported P&E and improve the accuracy of information contained in the P&E records, the Commissioner of Internal Revenue should direct the Chief Financial Officer to review all lease agreements to determine whether they meet the criteria for capital leases and capitalize and properly record any leases that meet the criteria.

    Agency Affected: Department of the Treasury: Internal Revenue Service

 

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