Management Letter:

Improvements Needed in IRS' Accounting Procedures and Internal Controls

GAO-01-880R: Published: Jul 30, 2001. Publicly Released: Jul 30, 2001.

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In March 2001, GAO issued a report (GAO-01-394) on the results of its audit of the Internal Revenue Service's (IRS) financial statements and on the effectiveness of its internal controls for fiscal year 2000. This report reviews additional matters identified during GAO's fiscal year 2000 audit regarding accounting procedures and internal controls that could be improved. GAO found that IRS had immaterial internal control issues that affected reporting. IRS (1) was unable to determine if its costs for reimbursable activities were accurate and whether it was recouping the costs of the goods or services it provided, (2) lacked procedures to properly record its working capital fund prepaid expenses, (3) accepted information from its contractors for inclusion in its year-end financial reporting without sufficient oversight or review, and (4) did not always follow standard procedures with respect to the transfer of funds between appropriations.

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: The Commissioner of Internal Revenue Service should ensure that IRS personnel maintain effective oversight of the completeness and accuracy of contractor-generated information.

    Agency Affected: Department of the Treasury: Internal Revenue Service

    Status: Closed - Implemented

    Comments: During its audit of IRS' fiscal year 2002 financial statements, GAO found that IRS personnel had effectively reviewed contractor-generated data. As a result, IRS improved the accuracy and reliability of contractor-generated data and reported more reliable information on its fiscal year 2002 financial statements.

    Recommendation: The IRS should develop and implement procedures to require that prepayments be recorded as assets routinely at the time the cost is incurred in accordance with generally acceptable accounting procedures. Services that are provided to IRS that will benefit IRS for more than one year should be established as prepaid expenses and amortized over the period of the benefit.

    Agency Affected: Department of the Treasury: Internal Revenue Service

    Status: Closed - Implemented

    Comments: IRS charged depreciation expenses and not the full cost of the assets acquired under the Working Capital Fund (WCF). IRS no longer capitalizes WCF assets on its balance sheet. This change effectively addresses the underlying issue that gave rise to GAO's recommendation. GAO concurs with IRS's accounting treatment for this transaction.

    Recommendation: To provide for more accurate records and better management of reimbursable activity, the Commissioner of Internal Revenue Service should ensure that IRS personnel routinely age and review currently open reimbursable receivable accounts to identify accounts that are no longer valid or collectible.

    Agency Affected: Department of the Treasury: Internal Revenue Service

    Status: Closed - Implemented

    Comments: IRS addressed this recommendation by initiating action in fiscal year 2001, to regularly age and review its reimbursable receivable accounts. GAO verified the effectiveness of these procedures during fiscal year 2002.

    Recommendation: To provide for more accurate records and better management of reimbursable activity, the Commissioner of Internal Revenue Service should ensure that IRS personnel establish procedures to periodically reconcile the subsidiary records to the control account for reimbursable receivables to ensure that the balance is adequately supported.

    Agency Affected: Department of the Treasury: Internal Revenue Service

    Status: Closed - Implemented

    Comments: IRS addressed this recommendation by implementing procedures in fiscal year 2002, to monthly reconcile its subsidiary records to the control account for reimbursable receivables.

    Recommendation: To allow the proper reporting of the cost of reimbursable activity, the Commissioner of Internal Revenue Service should ensure that IRS personnel develop a mechanism to track and report the actual costs associated with reimbursable activities.

    Agency Affected: Department of the Treasury: Internal Revenue Service

    Status: Closed - Implemented

    Comments: Closed. GAO confirmed that IRS revised its Internal Revenue Manual (IRM) to address this recommendation in February 2011. The IRM now includes guidance for tracking and reporting the actual costs associated with reimbursable activities. It further clarifies the processing steps for agreements requiring advance payments to ensure such payments are properly adjusted to actual costs incurred at the end of the agreement term.

    Recommendation: The Commissioner of Internal Revenue Service should direct IRS management to ensure that it complies with Treasury regulations requiring that all transfers of funds between appropriations be properly approved and documented prior to recording them in the financial records.

    Agency Affected: Department of the Treasury: Internal Revenue Service

    Status: Closed - Implemented

    Comments: Based on GAO's audit work for fiscal years 2001 and 2002, all transfers of funds between appropriations have been properly approved and documented prior to being recorded in the financial records.

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