Internal Revenue Service:

Progress Made, but Further Actions Needed to Improve Financial Management

GAO-02-35: Published: Oct 19, 2001. Publicly Released: Oct 19, 2001.

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This is a follow-on to GAO's report on its audit of the Internal Revenue Service's (IRS) fiscal year 2000 financial statements. Many of the issues raised in this report have persisted for years. IRS believes that the solution to many of these issues may lie in systems modernization. IRS plans to implement a new financial system that includes a cost accounting module as well as integrated administrative and custodial general ledgers that are supported by subsidiary ledgers containing the transactional details for key accounts, such as taxes receivable and property and equipment. IRS continues to make progress in addressing its financial management challenges. The strong commitment by IRS senior management to financial management reform has played a crucial role in the agency's progress so far and is critical for future improvements. IRS has developed many workaround processes that allowed it to produce reliable financial statements for fiscal year 2000. However, these processes take considerable time, effort, and expense and do not fix many of the fundamental financial management issues that continue to plague IRS.

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 reduce the magnitude of year-end adjustments and assist IRS in improving the reliability of its financial data on a routine basis, IRS should develop, document, and implement policies and procedures to require routine reviews and analyses of general ledger account balances to promptly identify errors and omissions.

    Agency Affected: Department of the Treasury: Internal Revenue Service

    Status: Closed - Implemented

    Comments: In fiscal year 2002, IRS issued a policy memorandum requiring quarterly reviews of the general ledger account balances and requiring that workpapers be established to document the reviews. This significantly reduced the amount of adjustments required at year end and improved the quality of interim data.

    Recommendation: To reduce the magnitude of year-end adjustments and assist IRS in improving the reliability of its financial data on a routine basis, IRS should develop, document, and implement policies and procedures to require recording corrections and adjusting entries throughout the year to reduce the magnitude of year-end adjustments and improve the reliability of interim financial data.

    Agency Affected: Department of the Treasury: Internal Revenue Service

    Status: Closed - Implemented

    Comments: In fiscal year 2002, IRS began recording corrections and adjusting entries when they were identified rather than at year end, thus reducing the magnitude of year end adjustments.

    Recommendation: To improve IRS' ability to collect and report on the full costs of its activities, IRS should implement policies and procedures to require that all employees itemize the time spent on specific projects on their time cards.

    Agency Affected: Department of the Treasury: Internal Revenue Service

    Status: Closed - Implemented

    Comments: IRS has taken action to address our recommendation. We confirmed that IRS currently uses 24 separate functional tracking (workload management) systems for various categories of employees to itemize and track their time charges. Collectively, these systems now capture details of time worked by project for all employees.

    Recommendation: To improve IRS' ability to collect and report on the full costs of its activities, IRS should implement policies and procedures to allocate nonpersonal costs to programs and activities routinely throughout the year.

    Agency Affected: Department of the Treasury: Internal Revenue Service

    Status: Closed - Implemented

    Comments: IRS has taken actions to address this recommendation. We confirmed that IRS has improved its cost accounting capabilities by developing and implementing a methodology for allocating its costs of operations to its business units and to the cost categories on the Statement of Net Cost on a monthly basis. However, the cost categories on the Statement of Net Cost are at a higher level than specific programs and activities. Although IRS has developed full cost information on several IRS programs, IRS has not developed such information on the full range of IRS programs. However, in order to provide recommendations more closely aligned with the current status, we have agreed with IRS to close this recommendation based on IRS's progress to date and have reported the remaining issues, along with related recommendations for corrective action, in our June 2009 management report, see GAO-09-513R.

    Recommendation: To provide assurance on the reliability of performance data, IRS should document reviews performed to validate that performance data are complete, accurate, and reliable.

    Agency Affected: Department of the Treasury: Internal Revenue Service

    Status: Closed - Implemented

    Comments: In fiscal year 2002, IRS completed documenting its key controls for each of its key performance measures. As a result, by the end of fiscal year 2002, IRS has documented key controls in place to validate that performance data reported in its Management Discussion & Analysis (MD&A) is complete, accurate, and reliable.

    Recommendation: To address weaknesses in the timely recording of property and equipment (P&E) transactions while an integrated P&E financial system is being developed, IRS should implement policies and procedures to record capitalizable acquisition costs for property and equipment, capital leases, leasehold improvements, and major systems in the appropriate P&E general ledger accounts as transactions occur.

    Agency Affected: Department of the Treasury: Internal Revenue Service

    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 property and equipment additions in the appropriate general ledger accounts as they occur. During our FY 2005 audit, we found that IRS was generally recording P&E transactions as they occurred.

    Recommendation: To ensure that Sub-Object Class (SOC) codes facilitate compilation of capitalizable P&E transactions in the proper general ledger asset accounts and, if applicable, lease liability accounts, IRS should revise the definitions of SOC codes pertaining to P&E or establish new codes so that individual SOC codes cannot be used for both capitalizable purchases (assets) and noncapitalizable purchases (expenses). For example, the SOC code used to record capitalizable software costs should not be used to record noncapitalizable software license fees.

    Agency Affected: Department of the Treasury: Internal Revenue Service

    Status: Closed - Implemented

    Comments: GAO confirmed that IRS revised the P&E SOC codes and definitions in Standard Announcement #2002-01, Financial Management Codes Handbook.

    Recommendation: To ensure effective management of available funding and accurate reporting of obligations, IRS should perform periodic reviews to monitor and ensure that obligations are promptly established in the accounting system. Such reviews would assist IRS in maintaining accurate and complete records of its obligations, and in reducing the risk of obligations exceeding available funding.

    Agency Affected: Department of the Treasury: Internal Revenue Service

    Status: Closed - Implemented

    Comments: During fiscal year 2002, IRS developed a listing of unliquidated commitments to use as a tool for ensuring that related obligations are promptly recorded in its accounting system. In fiscal year 2003, IRS began requiring its business units to certify their review of unliquidated commitments, thereby further improving its procedures and practices to ensure obligations were promptly recorded. During its fiscal year 2003 audit, GAO found that IRS promptly established obligations in its accounting system.

    Recommendation: To reduce the magnitude of year-end adjustments and assist IRS in improving the reliability of its financial data on a routine basis, IRS should develop, document, and implement policies and procedures to require monthly reconciliations between proprietary and budgetary accounts so that differences can be identified promptly and, if necessary, adjusted.

    Agency Affected: Department of the Treasury: Internal Revenue Service

    Status: Closed - Implemented

    Comments: During fiscal year 2003, GAO verified that quarterly reconciliations between budgetary and proprietary accounts were performed and documented. Informal reconciliations are prepared monthly. Adjustments/reconciling items are recorded in the general ledger in the next accounting period. In addition, IRS has recorded user fee revenues and transfers at interim periods. This has significantly improved the reliability of related balances during the year, and has reduced the balance of the suspense account at June 30, 2003, to $22 million and $6 million as of fiscal year end 2003.

    Recommendation: To ensure that reported budget data are reliable on a routine basis, IRS should incorporate into its systems modernization blueprint the capability to differentiate prior-year adjustments between activities that are valid upward and downward adjustments to obligations and activities that are not valid adjustments to obligations. Such actions would help ensure that activities that are not valid adjustments to obligations are not recorded as adjustments to obligations.

    Agency Affected: Department of the Treasury: Internal Revenue Service

    Status: Closed - Implemented

    Comments: IRS reported, and GAO confirmed, that it incorporated into its new financial system's core requirements the capability to differentiate between activities that are valid adjustments to prior years' obligations and activities that are not valid adjustments.

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