Internal Revenue Service:

Recommendations to Improve Financial and Operational Management

GAO-01-42: Published: Nov 17, 2000. Publicly Released: Nov 17, 2000.

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During fiscal year 1999, the Internal Revenue Service (IRS) made several improvements to address financial management issues that GAO raised in earlier reports. However, serious internal control and financial weaknesses continue to undermine the agency's ability to manage operations and produce reliable financial information. These weaknesses affect IRS' ability to, (1) manage unpaid assessments, (2) disburse taxpayer refunds, (3) safeguard manual tax receipts and taxpayer information, (4) account for property and equipment, (5) account for appropriated funds, and (6) collect and report financial data. These problems resulted from, (1) deficient operational and financial systems, (2) inadequate internal controls, and (3) policies and procedures that were not being consistently followed. The improvements that have been made so far focus on ad hoc work-arounds intended to yield immediate results for the limited purpose of reporting reliable annual financial statement information, but they have not corrected underlying long-term systems deficiencies. In addition, IRS has been unable to develop and maintain reliable and timely cost/benefit information to evaluate the relative merits of its various tax collection and enforcement activities. Until IRS undertakes more systemic, short- and long-term corrections, it will continue to lack the performance information it needs to effectively manage its operations, and losses to the federal government and the burden to the taxpayers will likely continue.

Matter for Congressional Consideration

  1. Status: Closed - Implemented

    Comments: In the Senate reports accompanying the Financial Services and General Government Appropriations Acts for fiscal year 2010 and 2011, respectively, Congress directed IRS to provide the Congressional Committees on Appropriations with detailed information about the actual costs, revenues, and return on investment after the first and successive years of the implementation of new enforcement initiatives. This action meets our objectives in asking Congress to consider this issue, and significantly improves the information available to (1) IRS management to make informed resource allocation decisions, and (2) Congress, to make informed funding decisions.

    Matter: In order to make available information to better assist it in making informed decisions regarding the budget and staffing of IRS, Congress should consider requiring that IRS include in any budget request for additional resources associated with its various collection and enforcement activities reliable cost-based performance indicators and other relevant aggregate cost/benefit data that demonstrate the benefits of providing such resources.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: IRS issued a memorandum to the field offices emphasizing the timely input of the freeze code and revised the Internal Revenue Manual procedures to allow 30 days for the assessment of the trust fund penalty after input of the freeze code. After IRS took action, GAO's financial audit procedures in 2002 and 2003 did not identify any instances of inadvertent release of refunds due to lack of freeze codes.

    Recommendation: To increase IRS' ability to collect outstanding amounts owed by taxpayers, the Commissioner of Internal Revenue should better monitor adherence to its own procedures requiring that a freeze code be entered on all accounts of a taxpayer whom IRS had determined is potentially liable for unpaid payroll taxes. This should be done on all such accounts to prevent the inadvertent release of refunds to the taxpayer until IRS determines the validity of the tax liability.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  2. Status: Closed - Implemented

    Comments: IRS enhanced its policies and procedures to monitor the processing of abatement transactions. However, due to the complex nature of resolving underlying issues for certain types of abatements, IRS did not establish specific time frames for processing abatements. For example, large dollar claims often require additional documentation to verify a claim's validity. Often these claims go through examination, or have other taxpayer compliance issues. Based on our fiscal year 2004 audit, we found that IRS was processing abatements in a reasonable manner.

    Recommendation: To improve the accuracy of taxpayer accounts, reduce the potential for a taxpayer burden, and reduce the cost associated with interest IRS must pay on refunds issued to taxpayers, IRS should revise policies and procedures governing the processing of abatement transactions to establish: (1) appropriate time frames for processing abatements; (2) a methodology for monitoring the timeliness of abatement processing; and (3) procedures to identify the causes for delays and formulate corrective actions.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  3. Status: Closed - Implemented

    Comments: IRS enhanced its policies and procedures to monitor the processing of abatement transactions. Based on its fiscal year 2004 audit, GAO found that IRS was processing abatements in a reasonable manner.

    Recommendation: To improve the accuracy of taxpayer accounts, reduce the potential for a taxpayer burden, and reduce the cost associated with interest IRS must pay on refunds issued to taxpayers, IRS should examine abatement transactions arising from IRS errors to determine the causes for the errors and, based on this examination, formulate and implement appropriate procedures to reduce the level of errors made when entering data into taxpayer accounts.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  4. Status: Closed - Implemented

    Comments: Over the last several years, IRS has made significant improvements in the timeliness of Offer in Compromise (OIC) investigations. IRS implemented two Centralized Offer in Compromise (COIC) sites that process lower dollar and less complex offers. Because initial processing and statutory reviews added 90 days or more to processing time for field offers, IRS adjusted the processing goal for field-based offers to 9 months, effective October 2004. IRS strengthened management controls by creating additional management reports on OIC inventories, closely monitoring age and inventory levels, and developing more specific expectations for timely case actions. GAO noted that IRS improved its procedures for monitoring the age of pending offers and it significantly increased its closure rate for offers in compromise.

    Recommendation: To reduce delays in processing offers-in-compromise, IRS should implement procedures to monitor the age of all pending offers and to require supervisors to follow up with staff to determine within six months whether to accept or reject the offer.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  5. Status: Closed - Not Implemented

    Comments: IRS has taken significant steps to address this recommendation, such as taking several actions to improve its ability to develop full cost information for its enforcement program. Although IRS's actions taken to date are important, it has not fully addressed the objectives of the recommendation, such as completing the development of full cost methodologies for IRS's program activities. In order to provide recommendations more closely aligned with the current status, GAO agreed with IRS to close this recommendation based on IRS's progress to date and reported the remaining issues, along with related recommendations for corrective action, in its June 2009 management report. See GAO-09-513R and GAO-09-514 recommendations 09-14, 09-15, and 09-16.

    Recommendation: To provide IRS management with the information it needs to make informed funding and staffing decisions regarding resource needs for federal tax revenue collection activities, IRS should in short term, as an alternative to prematurely suspending active collection efforts and using the best available information, develop reliable cost/benefit data relating to collection efforts for cases with some collection potential. These cost/benefit data would include the full cost associated with the increased collection activity (i.e., salaries, benefits, administrative support), as well as the expected additional tax collections generated.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  6. Status: Closed - Implemented

    Comments: IRS incorporated the capability to measure the cost-benefit of collection activities and to make informed resource allocation decisions into its systems modernization blueprint and strategic planning process.

    Recommendation: To provide IRS management with the information it needs to make informed funding and staffing decisions regarding resource needs for federal tax revenue collection activities, IRS should in the long term, incorporate into its systems modernization blueprint and strategic planning process the capability to routinely and reliably measure the cost/benefit of its collection activities and make informed resource allocation decisions.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  7. Status: Closed - Implemented

    Comments: IRS has taken a number of actions over the years to improve the timeliness of lien release processing, including (1) system enhancements to improve the timeliness of recognizing when a taxpayer has fully satisfied an outstanding tax liability, and (2) conducting semi-annual testing to evaluate the timeliness of its release of tax liens. In October 2013, IRS formalized its semi-annual reviews of lien releases by including the requirement for these reviews in its Internal Revenue Manual (IRM). Our review of IRS's lien release timeliness in 2013 and 2012 found significant improvements in lien release timeliness over prior years.

    Recommendation: To improve compliance with Section 6325 of the Internal Revenue Code, we recommend that IRS implement procedures to closely monitor the release of tax liens so that they are released within 30 days of the date the related tax liability is fully satisfied. As part of these procedures, IRS should carefully analyze the causes of the delays in releasing tax liens identified by GAO's work and prior work by IRS' former internal audit function and ensure that such procedures effectively address these issues.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  8. Status: Closed - Implemented

    Comments: In October 2000, IRS revised its procedures to require documenting the monitoring actions and supervisory review of the monitoring actions. GAO confirmed that IRS revised its written procedures.

    Recommendation: To ensure that IRS staff members who initiate manual refund processing appropriately monitor taxpayer accounts in accordance with IRS policy, IRS should revise the Internal Revenue Manual (IRM) to require that IRS employees who initiate manual refunds document their monitoring actions on case history sheets.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  9. Status: Closed - Implemented

    Comments: In October 2000, IRS revised its procedures to require documenting the monitoring actions and supervisory review of the monitoring actions. GAO confirmed that IRS revised its written procedures.

    Recommendation: To ensure that IRS staff members who initiate manual refund processing appropriately monitor taxpayer accounts in accordance with IRS policy, IRS should revise the IRM to require that supervisors review monitoring actions and document their review.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  10. Status: Closed - Not Implemented

    Comments: Although IRS did not directly address the problems with the Questionable Refund Report, GAO found that IRS staff are using DUPREF, which performs a similar function.

    Recommendation: To improve procedures for electronically identifying duplicate refunds to prevent their issuance, IRS should determine why the program that generates the Questionable Refund Report was not functioning as intended during fiscal year 1999 and implement appropriate corrective actions.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  11. Status: Closed - Implemented

    Comments: IRS implemented an automatic freeze code on refunds associated with questionable Earned Income Tax Credits and uses expanded data to identify questionable refunds.

    Recommendation: To maximize the effectiveness of existing IRS initiatives in reducing the rate of improper Earned Income Tax Credits (EITC), IRS should determine why service centers have not been more effective in stopping refunds associated with questionable EITCs and make changes to current procedures as appropriate.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  12. Status: Closed - Implemented

    Comments: IRS implemented an automatic freeze code on Earned Income Tax Credit (EITC) related refunds when there is an ongoing EITC examination case. GAO also confirmed that IRS implemented a control to help prevent taxpayers from receiving an EITC if they had previously been found ineligible.

    Recommendation: To maximize the effectiveness of existing IRS initiatives in reducing the rate of improper EITCs, IRS should review its procedures for enforcing taxpayer compliance with the Taxpayer Relief Act of 1997 and implement actions to prevent taxpayers who had been denied an EITC for tax year 1997 or any subsequent year from being granted an EITC in successive years until such time as they have provided the requisite supporting documentation.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  13. Status: Closed - Implemented

    Comments: GAO confirmed that IRS now retains the data on the number and dollar amount of claims screened through the Electronic Fraud Detection System.

    Recommendation: To maximize the effectiveness of existing IRS initiatives in reducing the rate of improper EITCs, IRS should track the total number of and dollars in EITCs subjected each year to Electronic Fraud Detection System (EFDS) screening and related efforts to enable IRS to estimate the full magnitude of suspicious EITCs and determine the level of resources to be devoted to EFDS screening and investigative follow-up appropriate for the risks and potential losses involved.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  14. Status: Closed - Not Implemented

    Comments: IRS has taken significant steps to address this recommendation. For example, IRS completed several cost pilot projects in fiscal year 2008, which demonstrated that IRS has the ability to determine the full cost of its programs. IRS's actions taken to date are important, but they have not fully addressed the objectives of our recommendation. For example, the cost pilot project methodology is time-consuming and requires intensive manual intervention, and IRS has not completed the task of developing methodologies for all its significant programs and activities. In order to provide recommendations more closely aligned with the current status of IRS's information needs and capabilities, GAO is closing 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 (GAO-09-513R).

    Recommendation: To provide IRS management with the information it needs to make informed funding and staffing decisions concerning: (1) IRS' Automated Underreporter System (AUR) and Combined Annual Wage Reporting (CAWR) programs; (2) IRS' screening and examination of EITC claims; and (3) identifying and collecting previously disbursed improper refunds, IRS should, in short term, and using the best available information, develop reliable cost/benefit data to estimate the tax revenue collected by, and the amount of improper refunds returned to, IRS for each dollar spent pursuing these outstanding amounts. These data would include: (1) an estimate of the full cost incurred by IRS in performing each of these efforts, including the salaries and benefits of all staff involved, as well as any related nonpersonnel costs, such as supplies and utilities; and (2) the actual amount: (a) collected on tax amounts assessed; and (b) recovered on improper refunds disbursed.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  15. Status: Closed - Implemented

    Comments: IRS incorporated into its systems modernization blueprint the ability to routinely and reliably measure and analyze cost-benefit information.

    Recommendation: To provide IRS management with the information it needs to make informed funding and staffing decisions concerning: (1) IRS' AUR and CAWR programs; (2) screening and examination of EITC claims; and (3) identifying and collecting previously disbursed improper refunds, IRS should, in the long term, incorporation its systems modernization blueprint and strategic planning process capabilities for routinely and reliably measuring the cost/benefit of each of these efforts, based on the factors indicated above, and make informed resource allocation decisions.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  16. Status: Closed - Implemented

    Comments: All IRS employees and contractors (i.e., couriers and janitors) are now required to complete Federal Bureau of Investigation fingerprint checks before accessing taxpayer data. However, the requirements for couriers need to be further revised to be more consistent with campus courier requirements.

    Recommendation: To improve controls at IRS lockbox banks, IRS should work with the Department of the Treasury's FMS to revise the current lockbox contracts to emphasize secure fingerprint checks be completed before employees begin working.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  17. Status: Closed - Implemented

    Comments: All IRS employees and contractors (i.e., couriers and janitors) are now required to complete Federal Bureau of Investigation fingerprint checks before accessing taxpayer data. However, the requirements for couriers need to be further revised to be more consistent with campus courier requirements.

    Recommendation: To improve controls at IRS lockbox banks, IRS should work with the Department of the Treasury's FMS to revise the current lockbox contracts to emphasize secure temporary employees be subjected to background checks that are consistent with those required for IRS employees.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  18. Status: Closed - Implemented

    Comments: IRS developed lockbox bank security standards and included such provisions in the calendar year 2002 contracts.

    Recommendation: To improve controls at IRS lockbox banks, IRS should work with the Department of the Treasury's FMS to revise the current lockbox contracts to emphasize security requirements and to specifically require that, at a minimum, the lockbox bank courier services meet the service center requirements contained in IRS' November 16, 1999, policy.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  19. Status: Closed - Implemented

    Comments: Multi-disciplinary teams composed of management from Mission Assurance and Security Services, Information Services, and Agency-Wide Shared Services will continue to work with local staff to ensure consistent, on-going implementation of policies and procedures. In April 2003, IRM 5.1.2 was revised with new sub-sections, including: Timeliness of Remittances and Physical Security Controls over Remittances. GAO verified that the IRM sections applicable to field offices, TACs, and SPCs contained consistent policies and procedures to safeguard and account for cash receipts.

    Recommendation: To obtain a minimum level of consistency in the policies and procedures related to the safeguarding of receipts, all IRS units receiving collections should have consistent policies and procedures to safeguard and account for cash receipts.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  20. Status: Closed - Implemented

    Comments: GAO confirmed that IRS is conducting periodic on-site reviews at service center campuses.

    Recommendation: To help ensure that staff consistently comply with new policies and procedures issued, IRS should perform and document periodic observations and reviews to monitor and enforce compliance with policies addressing the safeguarding of cash receipts.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  21. Status: Closed - Not Implemented

    Comments: IRS has made progress in implementing procedure to record leasehold improvement costs as they occur. However, in lieu of developing a subsidiary ledger to determine the amount of leasehold improvement costs to post to its financial statements each year as we recommended, IRS developed a methodology to estimate the amount to post. During our fiscal year 2011 audit, we identified both limitations in the estimation methodology as well as errors in implementing the methodology. 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 and have reported the remaining issues, along with related recommendations for corrective action in our June 2012 management report. (See recommendation numbers 12-17, 12-18 and 12-19 in GAO-12-683R.)

    Recommendation: To help ensure proper accounting and accountability over fiscal year 2000 and future property and equipment (P&E) additions and disposals, the Commissioner of Internal Revenue should develop a subsidiary ledger for leasehold improvements and implement procedures to record leasehold improvement costs as they occur.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  22. Status: Closed - Implemented

    Comments: IRS implemented the first release of IFS on November 10, 2004, which incorporated procedures to allow IRS to record the majority of P and E additions in the appropriate general ledger accounts as they occur. During our fiscal year 2005 audit, we found that IRS was generally recording P and E transactions as they occurred.

    Recommendation: To help ensure proper accounting and accountability over fiscal year 2000 and future P&E additions and disposals, the Commissioner of Internal Revenue should implement procedures and controls so that expenditures for P&E are charged to the correct accounting codes to provide reliable records for extracting the costs for major systems and leasehold improvements.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  23. Status: Closed - Implemented

    Comments: GAO confirmed that IRS capitalized its major systems costs in fiscal year 2000.

    Recommendation: To help ensure proper accounting and accountability over fiscal year 2000 and future P&E additions and disposals, the Commissioner of Internal Revenue should establish a system to capture all costs related to the Prime Systems Integrated Services (PRIME) effort to modernize IRS' computer systems.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  24. Status: Closed - Implemented

    Comments: GAO confirmed that IRS developed policies and procedures to implement SFFAS No. 10 that resulted in the direct and indirect cost of internal use software being capitalized.

    Recommendation: To help ensure proper accounting and accountability over fiscal year 2000 and future P&E additions and disposals, the Commissioner of Internal Revenue should develop procedures and systems to capture and capitalize the cost of internally developed software in accordance with Statement of Federal Financial Accounting Standards (SFFAS) No. 10, Accounting for Internal Use Software.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  25. Status: Closed - Implemented

    Comments: In June 2002, IRS issued a revised Internal Revenue Manual (IRM) 2.14.1 to establish clear accountability in the receipt, distribution, excess, and/or disposal of ADP hardware, software, and telecommunications equipment throughout IRS. In August 2004, IRS revised and republished IRM 2.14.1, Information Technology (IT) Asset Management. In January 2005, IRS revised IRM 1.14.4, Personal Property Management to establish policies and procedures pertaining to non-IT assets. These revised IRMs now provide comprehensive, authoritative guidance for all P and E.

    Recommendation: To help ensure proper accounting and accountability over fiscal year 2000 and future P&E additions and disposals, the Commissioner of Internal Revenue should consolidate and update the P&E policies and procedures currently documented in various handbooks and policy memorandums into a comprehensive document that personnel responsible for maintaining inventory records can use as a reference.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  26. Status: Closed - Implemented

    Comments: IRS reported that the Chief Information Officer now has the authority and responsibility for management and control of all ADP property. Once non-ADP property is consolidated into the new, single inventory system, the CIO will have responsibility for all property.

    Recommendation: To help ensure proper accounting and accountability over fiscal year 2000 and future P&E additions and disposals, the Commissioner of Internal Revenue should assign a senior-level position with overall responsibility for verifying that P&E records are accurate and P&E are properly accounted for.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  27. Status: Closed - Implemented

    Comments: GAO confirmed that IRS established Single Point Inventory Function (SPIF) procedures to ensure prompt notification to SPIF units when P and E is received, moved, or disposed.

    Recommendation: To help ensure proper accounting and accountability over fiscal year 2000 and future P&E additions and disposals, the Commissioner of Internal Revenue should develop and implement procedures so that personnel responsible for maintaining P&E inventory records receive prompt notification when P&E is received, moved, or disposed of. Procedures should help ensure that those responsible for maintaining inventory records promptly receive documentation supporting P&E transactions, such as receiving reports, invoices, and disposal documents.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  28. Status: Closed - Implemented

    Comments: In July 2000, IRS issued Single Point Inventory Function (SPIF) procedures requiring that property and equipment be recorded within 10 days of receipt, not when the P and E is put into service. GAO closed the recommendation based on the action taken.

    Recommendation: To help ensure proper accounting and accountability over fiscal year 2000 and future P&E additions and disposals, the Commissioner of Internal Revenue should revise guidance on recording P&E to clearly state that P&E is to be recorded when title passes to IRS or when delivered, based on the terms of the contract regarding shipping and delivery. This is to clarify that P&E and related accounts payable should be promptly recorded when received, in accordance with SFFAS No. 6, rather than when P&E is placed in service.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  29. Status: Closed - Implemented

    Comments: IRS reported that all personnel responsible for the maintenance of inventory completed training August 2001. During its fiscal year 2001 IRS financial audit, GAO confirmed that IRS personnel responsible for maintaining P and E inventory received training.

    Recommendation: To help ensure proper accounting and accountability over fiscal year 2000 and future P&E additions and disposals, the Commissioner of Internal Revenue should provide training on P&E policy and procedures to personnel responsible for maintaining inventory records to help ensure that P&E transactions are promptly and accurately recorded.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  30. Status: Closed - Implemented

    Comments: IRS implemented ongoing quality assurance activities to ensure that the ADP inventory is properly maintained and that edit checks have been designed to correct data on inventory records during the inventory process.

    Recommendation: To help ensure proper accounting and accountability over fiscal year 2000 and future P&E additions and disposals, the Commissioner of Internal Revenue should review, and correct as necessary, data in inventory records, such as serial or periodic inventories of P&E.

    Agency Affected: Department of the Treasury: Internal Revenue Service: Chief Financial Officer

  31. Status: Closed - Implemented

    Comments: IRS reported that it established an electronic packing slip initiative, which helped establish accurate inventory records. IRS also implemented procedures to identify potential errors and discrepancies on inventory records and produce exception reports that are reviewed by SPIF personnel on a biweekly basis. GAO found significant improvement in the accuracy of IRS's P and E inventory records during its fiscal year 2003 audit.

    Recommendation: To help ensure proper accounting and accountability over fiscal year 2000 and future P&E additions and disposals, the Commissioner of Internal Revenue should perform sufficient supervisory reviews to help ensure that transactions recorded on P&E inventory records are accurately entered into subsidiary records and appropriately supported by documentation.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  32. Status: Closed - Implemented

    Comments: GAO found during its fiscal year 2000 IRS financial audit that IRS analyzed its obligations and deobligated those that it deemed were no longer valid.

    Recommendation: To effectively manage and report its undelivered orders, the Office of IRS' Chief Financial Officer (CFO) should periodically analyze outstanding obligations. This would include developing and analyzing an aging of obligations to identify potential items that may require deobligation. The CFO office should then coordinate with the financial plan managers to help ensure that invalid undelivered orders are promptly deobligated. This would enable IRS to use those funds deobligated within the period of obligational authority to acquire items it needs.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  33. Status: Closed - Implemented

    Comments: This recommendation relates to the IRS suspense account. During GAO's audit of IRS's fiscal year 2000 financial statements, IRS was able to provide a detailed listing supporting its suspense account.

    Recommendation: To assist IRS in resolving and clearing outstanding items in its suspense account, IRS should develop a subsidiary ledger that shows underlying detailed transactions and reconciles, by year, to the balances in the administrative general ledger. IRS should first clear old outstanding items in the general ledger to reflect actual balances by fiscal year.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  34. Status: Closed - Implemented

    Comments: During fiscal year 2000, IRS revised the format of its statement of net cost and significantly expanded and enhanced the related disclosures. The resulting financial statement presentation appropriately classified the cost of IRS's programs. However, it was not clearly consistent with the related classification of funding requirements in IRS's budgetary requests to Congress as recommended. During fiscal year 2001, IRS again revised the format of its Statement of Net Cost. The revised format was consistent with IRS's budgetary requests.

    Recommendation: To help ensure that payroll and related costs of IRS' programs are reliably and clearly reported in IRS' financial statements, IRS should develop policies and procedures to classify program costs according to the nature of the work performed and in a manner commonly understood by users of financial statements. This classification should also be consistent with the classification of related funding requirements in IRS' budgetary requests to Congress.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  35. Status: Closed - Implemented

    Comments: GAO confirmed that IRS has plans for IFS including a cost accounting system, and will follow-up on the implementation of IRS's cost accounting system during future audits.

    Recommendation: To: (1) assist in the management of IRS' programs; and (2) enable IRS to generate and report reliable cost-based performance data for all programs and activities to support its reporting under the Government Performance and Results Act of 1993 and in accordance with federal accounting standards, IRS should incorporate into its tax systems modernization plans, as they relate to financial management, the development of a cost accounting system that will track and report, in appropriate detail, the full costs associated with its activities and programs at the project and subproject level. This system should include a payroll system that provides for activity-based costing of individual jobs to which staff are assigned.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  36. Status: Closed - Implemented

    Comments: IRS reported implementing compensating control procedures, including checking the reasonableness of payroll expenses by pay period, verifying dollars expended per Treasury against IRS's general ledger, and testing the accuracy of payroll data against timesheets and personnel records for a random sample of employees. GAO confirmed that these compensating control procedures were effectively implemented.

    Recommendation: To obtain reasonable assurance that its payroll information is not adversely affected by weaknesses in the National Finance Center's (NFC) internal controls, IRS should review the Department of Agriculture's Office of the Inspector General annual audit report on NFC's internal control structure and any relevant GAO reports, evaluate the risk in the control environment at NFC, and implement control procedures as necessary to mitigate the risks associated with the weaknesses identified in NFC's payroll processing systems. These procedures could include but are not limited to: (1) selecting a random sample of NFC payroll disbursements, at least quarterly (e.g. 25 per quarter), and comparing the payroll cost information received from NFC to corresponding data provided to NFC; and (2) periodically analyzing overall payroll expenses to determine their reasonableness. IRS should appropriately document how it implements and executes these compensating controls.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  37. Status: Closed - Implemented

    Comments: During fiscal year 2003, IRS implemented interim accruals to more timely record material administrative activities, such as rent, postage, and telephone expenses. This has significantly improved the reliability of related balances during the year. During fiscal year 2004, GAO verified that IRS began estimating and recording a taxes receivable and related liability balance on a monthly basis.

    Recommendation: For IRS' financial statements to be supported by, and traceable to, a general ledger that accurately and promptly recognizes all of IRS' financial transactions, in the short term, IRS should establish policies and procedures to help ensure that all administrative and, to the extent possible, custodial transactions are promptly recorded in the appropriate general ledger accounts, preferably within 30 days of the transaction.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  38. Status: Closed - Implemented

    Comments: GAO has reviewed the role that EDW/CAP will play in resolving custodial financial management issues. EDW/CAP, when implemented is designed to feed the IFS GL daily summarized custodial financial information. It is expected to provide (1) the ability to generate timely and reliable custodial financial information with full traceability between the detail and the custodial financial statement and (2) full traceability between the detail taxpayer transactions the Standard General Ledger in IFS. GAO will assess the implementation of these projects in future audits.

    Recommendation: In the long term, IRS should incorporate into its systems modernization plan requirements and specifications for a general ledger system that: (1) accumulates and summarizes IRS' custodial and administrative transactions for financial reporting; (2) is integrated with its supporting subsidiary records; and (3) is fully compliant with the Standard General Ledger at the transaction level.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  39. Status: Closed - Implemented

    Comments: GAO verified that IRS issued a memorandum requiring that the acceptance date be entered when services have been performed or when goods are received, rather than the date acceptance is input to the accounting system.

    Recommendation: To effectively determine its accounts payable balance, IRS should enhance its year-end accrual procedures and controls by helping to ensure that procedure manuals require that accruals be recorded when services have been performed and goods received, regardless of whether an invoice has been received. This may require recording estimates of costs incurred based on reliable data. In these cases, additional detailed guidance should be provided in determining the amounts.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  40. Status: Closed - Implemented

    Comments: GAO confirmed that IRS issued guidance directing staff to record the date that goods and services are received as the acceptance date, rather than the date the acceptance was input into the system.

    Recommendation: To effectively determine its accounts payable balance, IRS should enhance its year-end accrual procedures and controls by helping to ensure that the acceptance date entered in Request Tracking System/Integrated Procurement System represents the date that IRS received the goods and services rather than the date acceptance that was entered into the system.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  41. Status: Closed - Implemented

    Comments: To address this recommendation, IRS revised its accrual process in fiscal year 2000, and no longer relies on the program managers to determine the accrual amounts. For fiscal year 2000, IRS based its accrual estimates on payments processed, manual document tracking, and estimated costs for major contracts.

    Recommendation: To implement the procedures successfully, IRS should provide training to key program offices on the accrual process.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  42. Status: Closed - Implemented

    Comments: In fiscal year 2000, IRS prepared and implemented written procedures for their excise tax certification process. GAO found no manual errors in the fiscal year 2000 review of IRS certifications.

    Recommendation: To ensure consistency, strengthen internal controls, and reduce IRS' dependence on one individual for its process of certifying excise tax distributions to trust funds, IRS should develop, document, and implement detailed written procedures for summarizing data used to produce the trust fund certifications. IRS should clearly define the steps being performed and consistently apply them throughout the year. Whenever deviations are required, such as for prior-period adjustments, explanations should be properly documented.

    Agency Affected: Department of the Treasury: Internal Revenue Service

 

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