Management Report:

Improvements Are Needed to Enhance the Internal Revenue Service's Internal Control over Financial Reporting

GAO-16-457R: Published: May 18, 2016. Publicly Released: May 18, 2016.

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What GAO Found

During its audit of the Internal Revenue Service’s (IRS) fiscal years 2015 and 2014 financial statements, GAO identified several deficiencies in IRS’s internal control over financial reporting that while not considered to be material weaknesses or significant deficiencies either individually or collectively, nonetheless warrant IRS management’s attention. These control deficiencies relate to the following:

  • verification of manually classified unpaid tax assessments,
  • adjudication approval for applicants,
  • accountability over duress alarms,
  • oversight at taxpayer assistance centers,
  • initiation and monitoring of manual refunds,
  • certification of manual refunds,
  • quality review over input corrections,
  • accounting for missing and unverified assets,
  • accuracy and completeness of tangible property and equipment,
  • accounting for assets in the general ledger,
  • authorization of asset disposals,
  • accuracy of future lease payment amounts for noncancelable operating leases, and
  • verification of payroll adjustments.

GAO is making 17 new recommendations to address these deficiencies in IRS’s internal control over financial reporting. Further, GAO found that IRS had completed corrective action on 17 of the 42 recommendations from GAO’s prior financial audits that remained open at the beginning of GAO’s fiscal year 2015 audit.As a result, IRS currently has 42 GAO recommendations that need to be addressed—the 25 prior open recommendations as well as the 17 new ones GAO is making in this report.

Why GAO Did This Study

The purpose of this report is to present those internal control deficiencies identified during GAO’s audit of IRS’s fiscal years 2015 and 2014 financial statements for which GAO did not already have any recommendations outstanding. The control deficiencies presented in this report are not considered to be material weaknesses or significant deficiencies; nonetheless, they warrant IRS management’s attention. This report provides new recommendations to address these internal control deficiencies and also presents the status, as of September 30, 2015, of IRS’s corrective actions taken to address GAO’s recommendations, detailed in GAO’s previous management reports, that remained open at the beginning of GAO’s fiscal year 2015 audit.

What GAO Recommends

This report provides 17 recommendations pertaining to the new control deficiencies. These recommendations are intended to improve IRS’s internal controls over its financial management and accountability of resources as well as bring IRS into conformance with its own policies and the Standards for Internal Control in the Federal Government. IRS stated that it remains committed to implementing appropriate improvements to ensure that IRS maintains sound financial practices. IRS agreed with GAO’s 17 recommendations and described actions it has taken or planned to take to address each recommendation.

For more information, contact Cheryl E. Clark at (202) 512-9377 or clarkce@gao.gov.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: On July 26, 2016, IRS issued a memorandum documenting a policy and procedures for the Revenue Transactional Analysis Section to annually review unpaid assessments that are manually classified. IRS also incorporated these in its fiscal year 2016 Unpaid Assessments Methodology. IRS's actions sufficiently address our recommendation.

    Recommendation: The IRS Commissioner should direct the appropriate IRS officials to establish and implement formal policies and procedures to annually review unpaid tax assessments that are manually classified to determine whether the classification is correct for the current fiscal year.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  2. Status: Open

    Comments: In December 2015, the HCO developed a process and revised procedures in an attempt to improve the monitoring of Employment Operations office decisions to reasonably assure that new employees do not enter on duty before prescreening adjudications are completed and approved by Personnel Security adjudicators. However, during our fiscal year 2016 audit, we identified IRS employees who entered on duty without completed or approved suitability adjudication determinations. We will continue to evaluate IRS's actions to address this recommendation during our fiscal year 2017 audit.

    Recommendation: The IRS Commissioner should direct the appropriate IRS officials to establish a process to prevent Employment Operations staff from allowing potential employees to enter on duty without favorable determinations of suitability by Personnel Security adjudicators.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  3. Status: Open

    Comments: While IRS responded that it established a policy and procedures, it did not provide documentation to sufficiently demonstrate that the policy and procedures were implemented. During our fiscal year 2016 audit, we identified an instance where an employee was allowed to enter on duty and it was subsequently discovered that this employee was deemed unsuitable for employment during the prescreening process. IRS did not provide additional documentation to demonstrate that its procedures had been carried out for this employee. We will continue to evaluate IRS's actions to address this recommendation during our fiscal year 2017 audit.

    Recommendation: The IRS Commissioner should direct the appropriate IRS officials to establish a policy and procedures requiring IRS officials to review and address situations in which it is later discovered that an employee deemed unsuitable for employment during the prescreening process was erroneously allowed to enter on duty.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  4. Status: Open

    Comments: According to IRS, in February 2016, AWSS developed and provided training on duress alarm validation and testing to FMSS specialists and managers. However, during our June 2016 field office audit testing, we found that the FMSS specialists responsible for the physical security at the sites we visited had not received training on duress alarm validation and testing. Further, our testing identified instances where (1) duress alarm testing did not include all duress alarms, (2) documented validations of the duress alarm inventory were not completed timely or available to individuals (FMSS and non-FMSS staff) before each test was conducted, and (3) descriptions of the duress alarm inventory used by the security specialist to conduct testing were labeled incorrectly. During follow up discussions with IRS officials, we were informed that FMSS specialists were not fully evaluating alarm test results and adhering to established procedures for monitoring those tests. We will continue to evaluate IRS's efforts to address this recommendation during our fiscal year 2017 audit.

    Recommendation: The IRS Commissioner should direct the appropriate IRS officials to develop and provide training, on a recurring basis, to all Facilities Management and Security Services specialists and managers involved in the duress alarm validation and testing process to reinforce the related policies and procedures.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  5. Status: Closed - Implemented

    Comments: In September 2016, the Wage and Investment organization developed a job aid that provides specific written guidance for TAC group managers to use in answering TSRRD review questions and outlines the territory managers' requirements for reviewing TSRRD submissions. IRS's actions sufficiently address our recommendation.

    Recommendation: The IRS Commissioner should direct the appropriate IRS officials to develop job aids that provide detailed written guidance for TAC (1) group managers for use in answering TSRRD review questions effectively and (2) territory managers that explicitly outline the requirements for reviewing TSRRD submissions.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  6. Status: Open

    Comments: IRS efforts to address this recommendation are ongoing. IRS stated that during fiscal year 2017, the Wage and Investment organization will incorporate into the IRM its new training policy requiring training for TAC group and territory managers on their TSRRD responsibilities, including specific instructions for completing questions in TSRRD and for reviewing TSRRD submissions. According to IRS, this training will be provided on a recurring basis to account for changes in TSRRD questions and newly hired or appointed TAC group and territory managers. As these actions occurred after the end of fiscal year 2016, we will evaluate IRS's actions to address this recommendation during our fiscal year 2017 audit.

    Recommendation: The IRS Commissioner should direct the appropriate IRS officials to establish and implement a policy requiring recurring training for TAC group and territory managers on their TSRRD responsibilities, including detailed instructions for completing responses to questions in TSRRD and for reviewing TSRRD submissions for accuracy and completeness. This training should be updated for changes in TSRRD questions over time and be provided to new TAC group and territory managers soon after they are hired or appointed.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  7. Status: Open

    Comments: IRS efforts to address this recommendation are ongoing. IRS stated that by September 2017, it will determine the reasons for staff noncompliance with established policies and procedures related to initiating, monitoring, and reviewing the monitoring of manual refunds, and based on this determination, establish a process to better enforce compliance with these requirements. We will continue to evaluate IRS's actions to address this recommendation during our fiscal year 2017 audit.

    Recommendation: The IRS Commissioner should direct the appropriate IRS officials to determine the reason(s) why staff did not always comply with IRS's established policies and procedures related to initiating, monitoring, and reviewing the monitoring of manual refunds and, based on this determination, establish a process to better enforce compliance with these requirements.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  8. Status: Open

    Comments: IRS stated that in February 2016, it provided a refresher course to COs as part of their annual training to address their responsibilities related to certifying manual refunds. However, based on our review of the refresher course materials, the course did not address our recommendation to enhance the training program. For example, the materials did not provide guidelines on how to perform the required reviews related to certifying manual refunds. As a result, during our fiscal year 2016 audit, we continued to find instances where the COs did not comply with the review requirements. We will continue to evaluate IRS's actions to address this recommendation during our fiscal year 2017 audit.

    Recommendation: The IRS Commissioner should direct the appropriate IRS officials to enhance the training program provided to COs to address all the job responsibilities related to certifying manual refunds for payment, including the required review of supporting documentation for manual refunds.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  9. Status: Closed - Implemented

    Comments: In March 2016, IRS issued a written reminder to IRS quality review units responsible for reviewing the work of ICO tax examiners reiterating the existing quality review requirements, including the selection and review of cases on a weekly basis. IRS indicated that it will reissue this reminder periodically, as needed. IRS's action sufficiently addresses our recommendation.

    Recommendation: The IRS Commissioner should direct the appropriate IRS officials to issue a written reminder to quality review units responsible for reviewing the work of ICO tax examiners reiterating the existing quality review requirement to select and review cases, on a weekly basis, worked by each ICO tax examiner.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  10. Status: Open

    Comments: IRS efforts to address this recommendation are ongoing. IRS stated that by September 2017, it will identify a cause of and implement a solution for dealing with the periodic backlogs of ICO inventory. We will continue to evaluate IRS's actions to address this recommendation during our fiscal year 2017 audit.

    Recommendation: The IRS Commissioner should direct the appropriate IRS officials to identify the cause of and implement a solution for dealing with the periodic backlogs of ICO inventory that is hampering the performance of quality reviews.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  11. Status: Open

    Comments: IRS's IT organization issued AM064, Asset Management Policy Directive to Identify Uncertified Class A and Class B Assets as Missing in KISAM, effective October 1, 2016. The directive states that in accordance with the annual Hardware Asset Management Inventory Certification Plan, assets that are not verified or certified for more than two inventory cycles should be identified as missing in IRS's property management system. It further states that the property management system should be updated by the end of the first quarter of the fiscal year after an asset meets the "missing" criterion. In November 2016, IRS's CFO organization developed the Missing Assets Financial Reporting Assessment procedure, which states that assets in missing status for 1 year or more should be removed from the P&E reported on IRS's financial statements. As these actions occurred after the end of fiscal year 2016, we will evaluate IRS's actions to address this recommendation during our fiscal year 2017 audit.

    Recommendation: The IRS Commissioner should direct the appropriate IRS officials to establish policies for (1) how long an asset can remain in missing status before it is removed from P&E reported on the financial statements and (2) how long assets can go unverified during the annual inventory process before they are identified as missing in the property management system.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  12. Status: Open

    Comments: In November 2016, IRS's CFO organization established the Missing Assets Financial Reporting Assessment procedure, which included procedures for identifying assets that have been in missing status in the property management system for 1 year or more and removing them from the P&E reported on the financial statements. As this procedure was established after the end of fiscal year 2016, we will evaluate IRS's implementation of this procedure during our fiscal year 2017 audit.

    Recommendation: The IRS Commissioner should direct the appropriate IRS officials to establish and implement procedures to reasonably assure that missing assets are timely removed from the financial statements when applicable.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  13. Status: Open

    Comments: IRS's IT organization established SOP FY17-01, Asset Management Program Monitoring and Review, effective October 1, 2016. The SOP details the IRS Asset Management Group's procedures for conducting a quarterly review on a sample of asset records and transactions in KISAM to verify the accuracy and completeness of key KISAM data elements and correct any discrepancies found. In September 2016, IRS issued AWSS-01-0916-0001, Interim Guidance for IRM 1.14.4, Personal Property Management, to require the FMSS territory manager or section chief to perform quarterly sample reviews of non-IT assets in KISAM to verify that key data elements are complete and updated. As these procedures were established after we conducted our internal control testing in fiscal year 2016, we will evaluate IRS's implementation of these procedures during our fiscal year 2017 audit.

    Recommendation: The IRS Commissioner should direct the appropriate officials to establish and implement monitoring procedures designed to reasonably assure that the key detailed information for tangible capitalized P&E is properly recorded and updated in the KISAM system.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  14. Status: Open

    Comments: IRS's actions to address this recommendation are ongoing. According to IRS, by September 2017, its CFO organization will implement a P&E subsidiary ledger, and will design and implement processes based on the subsidiary ledger that will reasonably assure the adequacy of detailed supporting information for tangible P&E amounts recorded in the general ledger. We will assess IRS's actions to address this recommendation during our fiscal year 2017 audit.

    Recommendation: The IRS Commissioner should direct the appropriate officials to design a process to reasonably assure the adequacy of detailed supporting information for tangible P&E amounts recorded in the general ledger.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  15. Status: Closed - Implemented

    Comments: In September 2016, IRS issued AWSS-01-0916-0001, Interim Guidance for IRM 1.14.4, Personal Property Management, to require the FMSS territory manager or section chief to perform quarterly sample reviews of disposal activities to verify that disposal actions are approved prior to the disposal of assets and by an approving authority (i.e., the FMSS territory manager or section chief). To facilitate the quarterly review, the interim guidance states that IRS FMSS Headquarters Property and Asset Management staff should (1) provide instructions and submission due dates for the review to the territories, (2) provide disposal sample data for each territory, (3) evaluate the territories' completed disposal sample review, and (4) provide the results of their evaluation to the territories. IRS's actions sufficiently address our recommendation.

    Recommendation: The IRS Commissioner should direct the appropriate IRS officials to update IRS policies and procedures for managerial reviews of disposal activities to explicitly instruct managers to assess whether disposal actions are approved by those authorized to do so and that approval is obtained prior to the disposal of assets.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  16. Status: Open

    Comments: In October 2016, IRS established procedures for calculating future lease payments for noncancelable operating leases that are reported in the notes to its financial statements. The procedures included (1) steps for considering any ad hoc clauses that may have specific termination dates and (2) a requirement for supervisor review to provide reasonable assurance of the accuracy of future lease payment amounts for noncancelable operating leases. As these actions occurred after the end of fiscal year 2016, we will evaluate IRS's actions to address this recommendation during our fiscal year 2017 audit.

    Recommendation: The IRS Commissioner should direct the appropriate IRS officials to establish and implement detailed written procedures for calculating future lease payments for noncancelable operating leases that are reported in the notes to the financial statements. The procedures should (1) include steps for considering any ad hoc clauses that may have specific termination dates and (2) include a requirement for supervisory review to provide reasonable assurance of the accuracy of future lease payment amounts for noncancelable operating leases.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  17. Status: Closed - Implemented

    Comments: In March 2016, IRS updated its accounting code guide for payroll adjustments to include detailed steps for human resources specialists to verify that submitted payroll adjustments processed by NFC are processed correctly, including against the correct pay period and fiscal year. IRS's action sufficiently addresses our recommendation.

    Recommendation: The IRS Commissioner should direct the appropriate IRS officials to update IRS's accounting code guide for payroll adjustments to include detailed steps for human resources specialists to verify that submitted payroll adjustments processed by NFC are processed correctly, including against the correct pay period and fiscal year.

    Agency Affected: Department of the Treasury: Internal Revenue Service

 

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