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entitled 'Financial Audit: IRS's Fiscal Years 2007 and 2006 Financial
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U.S. Government Accountability Office:
GAO:
Report to the Secretary of the Treasury:
November 2007:
Financial Audit:
IRS's Fiscal Years 2007 and 2006 Financial Statements:
GAO-08-166:
GAO Highlights:
Highlights of GAO-08-166, a report to the Secretary of the Treasury.
Why GAO Did This Study:
Because of the significance of Internal Revenue Service (IRS)
collections to overall federal receipts and, in turn, to the
consolidated financial statements of the U.S. government, which GAO is
required to audit, and Congress’s interest in financial management at
IRS, GAO audits IRS’s financial statements annually to determine
whether (1) the financial statements are reliable, and (2) IRS
management maintained effective internal controls. GAO also tests IRS’s
compliance with selected provisions of significant laws and regulations
and its financial systems’ compliance with the Federal Financial
Management Improvement Act of 1996 (FFMIA).
What GAO Found:
In GAO’s opinion, IRS’s fiscal years 2007 and 2006 financial statements
are fairly presented in all material respects. However, serious
internal control and financial management systems deficiencies
continued to make it necessary for IRS to rely on resource-intensive
compensating processes to prepare its financial statements. Because of
these and other deficiencies, IRS did not, in GAO’s opinion, maintain
effective internal controls over financial reporting (including
safeguarding of assets) or compliance with laws and regulations, and
thus did not provide reasonable assurance that losses, misstatements,
and noncompliance with laws and regulations material in relation to the
financial statements would be prevented or detected on a timely basis.
IRS has continued to make significant strides in addressing its
financial management challenges and has substantially mitigated several
material weaknesses in its internal controls. For example, IRS (1)
enhanced its reporting of tax receipts and accelerated its
certification of excise tax receipts to recipient trust funds, (2)
issued its first cost accounting policy to serve as guidance for
costing its services and activities, (3) enhanced its use of available
information to better target collection efforts on outstanding tax debt
and reduce the risk of improper refund disbursements, and (4) made
progress in establishing the framework for implementing a subsidiary
ledger for its tax administration activities. However, IRS’s ability to
fully address its remaining financial management issues largely depends
on addressing the limitations of its automated systems used to process
tax-related activities. IRS has also not determined how to apply the
cost information that resides in its core general ledger system for non-
tax activities to the activities processed by its separate tax
processing systems. Thus, it is unclear how or when these issues will
be resolved. GAO continues to consider issues related to IRS’s controls
over financial reporting, management of unpaid assessments, collection
of revenue and issuance of tax refunds, and information security to be
material weaknesses. Additionally, while IRS continued to make progress
in addressing weaknesses in controls over hard-copy taxpayer receipts
and data, GAO concluded that remaining issues related to this activity
constituted a significant deficiency. Also, GAO found that IRS was not
always in compliance with the law concerning the timely release of tax
liens.
IRS management faces serious challenges from its continued use of
obsolete financial management systems that do not conform to the
requirements of FFMIA. These challenges adversely affect IRS’s ability
to fulfill its responsibilities as the nation’s tax collector because
it is unable to routinely obtain comprehensive, timely, accurate, and
useful information for day-to-day decision making. In addition, as IRS
continues to progress toward ever more automated financial management
processes, the presence of material weaknesses in controls over these
systems, especially in the area of information security, could have
serious implications for our ability to determine whether IRS’s
financial statements are fairly stated.
What GAO Recommends:
Based on prior audits, GAO made numerous recommendations to IRS to
address the internal control and compliance issues that persisted
during fiscal year 2007. GAO will continue to monitor IRS’s progress in
implementing the 144 recommendations that remain open as of the date of
this report, of which 69 relate to the material weakness in information
security.
IRS agreed with the report’s findings and noted that it fairly
presented IRS’s progress and challenges. IRS noted that improving
information security continues to be a priority, and that it has a
solid management team in place to address remaining financial
management challenges.
For a fuller understanding of GAO’s opinion on IRS's fiscal years 2007
and 2006 financial statements, readers should refer to the complete
audit report, available by clicking on [hyperlink, http://www.GAO-08-
166], which includes information on audit objectives, scope, and
methodology. For more information, contact Steven J. Sebastian, (202)
512-3406, sebastians@gao.gov.
[End of section]
Contents:
Letter:
Auditor's Report:
Opinion on IRS's Financial Statements:
Opinion on Internal Controls:
Compliance with Laws and Regulations:
Systems Compliance with the Requirements of FFMIA:
Consistency of Other Information:
Objectives, Scope, and Methodology:
Agency Comments and Our Evaluation:
Management Discussion and Analysis:
Financial Statements:
Balance Sheets:
Statements of Net Cost:
Statements of Changes in Net Position:
Statements of Budgetary Resources:
Statements of Custodial Activity:
Notes to the Financial Statements:
Required Supplementary Information:
Other Accompanying Information:
Appendixes:
Appendix I: Material Weaknesses, Significant Deficiency, and Compliance
Issues:
Material Weaknesses:
Significant Deficiency:
Compliance Issues:
Appendix II: Details on Audit Methodology:
Appendix III: Comments from the Internal Revenue Service:
[End of section]
Comptroller General of the United States:
United States Government Accountability Office:
Washington, DC 20548:
November 9, 2007:
The Honorable Henry M. Paulson, Jr.:
The Secretary of the Treasury:
Dear Mr. Secretary:
The accompanying report presents the results of our audits of the
financial statements of the Internal Revenue Service (IRS) as of, and
for the fiscal years ending, September 30, 2007, and 2006. We performed
our audits in accordance with the Chief Financial Officers (CFO) Act of
1990, as expanded by the Government Management Reform Act of 1994. This
report contains our (1) unqualified opinions on IRS's financial
statements, (2) opinion that IRS's internal controls were not effective
as of September 30, 2007, (3) conclusion that IRS did not comply with
one provision of the laws and regulations we tested, and (4) conclusion
that IRS's financial management systems were not in substantial
compliance with the requirements of the Federal Financial Management
Improvement Act of 1996 as of September 30, 2007.
Our unqualified opinions on IRS's fiscal years 2007 and 2006 financial
statements were made possible in part by the continued extraordinary
efforts of IRS senior management and staff to compensate for serious
internal control and financial management systems deficiencies. IRS is
currently in the midst of a major business systems modernization that
is ultimately intended to resolve its most serious financial systems
challenges. However, it is unclear when this effort will be completed
or if it will be fully successful. In the interim, preparing reliable
financial statements will continue to be a difficult challenge for IRS,
requiring continued reliance on extraordinary compensating measures. To
date, these measures have proved successful: for the eighth consecutive
year, we have been able to render an unqualified opinion on IRS's
financial statements.
IRS has made great strides over the last several years in addressing
its financial management challenges and has resolved or substantially
mitigated several material weaknesses and other less significant
weaknesses in its internal controls. This progress continued in fiscal
year 2007. For example, during fiscal year 2007, IRS accelerated the
certification of excise tax receipts, thereby improving the timeliness
of distributions of such taxes to recipient trust funds. IRS also has
begun presenting estimates of its Social Security and Medicare tax
collections in other information accompanying its financial statements,
and presenting the most recent available information on the amount of
excise tax receipts certified to the Airport and Airways, Black Lung
Disability, and Highway Trust Funds in its Management Discussion and
Analysis. These actions enhanced the quality and disclosure of the
information presented to financial statement users, and enabled us to
conclude that these reporting issues no longer constitute internal
control deficiencies. IRS also made notable progress in using existing
management information to enable it to make more informed decisions
regarding collection of unpaid taxes and payment of refunds. However,
IRS has not yet developed the agencywide cost-benefit information
needed to assist in determining the optimum level of resources to
devote to maximizing collections of unpaid taxes and minimizing
payments of improper tax refunds in the context of its overall mission
and responsibilities, or to develop related cost-based performance
measures to assist in monitoring progress and adjusting strategies to
better address areas of noncompliance. IRS developed a cost accounting
policy during fiscal year 2007 that provides guidance on managerial
cost concepts for the agency, and has initiated cost pilot projects to
explore ways to apply its cost information to its various activities.
These actions represent a major step forward for IRS in its efforts to
develop the cost-benefit information it needs to make better informed
managerial decisions. However, the results of the cost pilots are not
expected until the last quarter of fiscal year 2008, and how
effectively IRS will apply the cost principles embodied in its new
policy remains unclear. In addition, IRS has continued to progress in
its efforts to develop detailed subsidiary records for its tax
administrative activities, but much remains to be done on this
multiyear effort. IRS has also continued to improve controls over hard-
copy taxpayer receipts and information at its submission processing
centers and lockbox banks. However, IRS has not yet reduced the risk of
loss of taxpayer receipts and information to an acceptable level.
IRS cannot fully address the financial management issues caused by the
limitations of its automated financial management systems without
additional modernization. In formulating its strategy for dealing with
these issues, IRS will also need to address how it will ultimately
apply cost information to its tax administration functions, including
collection of taxes, payment of tax refunds, and management of unpaid
tax assessments, which are accounted for in automated systems that are
physically separate from the Integrated Financial System that
encompasses IRS's cost module. As noted above, IRS has initiated
several pilot projects intended to explore ways of addressing this
issue, but the ultimate solution remains unclear. In 1995, we
designated financial management and systems modernization at IRS as
high-risk areas.[Footnote 1] We continue to consider these issues as
high risk and include them in our Business Systems Modernization high-
risk area.[Footnote 2]
Among the most serious financial management issues still remaining to
be addressed is the continued material weakness in IRS's information
security. As IRS continues its efforts to modernize its financial and
operational systems, it is critical that IRS take actions to establish
and maintain more effective information security controls on a
continuing basis, through an ongoing cycle of risk management
activities, to protect the processing, storage, and transmission of
financial and sensitive data. Until IRS successfully manages its
information security risks, management will not have adequate assurance
of the integrity and reliability of the information generated from its
financial management systems. In addition, as IRS continues to progress
toward ever more automated financial management processes, options for
alternate procedures to verify the accuracy of the information
contained in these systems without relying on automated controls within
them diminish. If IRS does not resolve this issue before these options
disappear, it could have serious implications for our ability to
determine whether IRS's financial statements are fairly stated.
We commend IRS for the improvements it has continued to make in its
financial processes and operations. The agency has made substantial
progress in improving its financial management since our first attempt
to audit its financial statements in fiscal year 1992. Nonetheless, IRS
management and staff will continue to be challenged to sustain the
level of extraordinary effort needed to produce reliable financial
statements that it has demonstrated over the past 8 years. Until the
agency is able to fully address the underlying systems and internal
control issues that have made this process so time consuming and
resource intensive, such efforts will continue to be necessary. While
it has made important progress, IRS continues to lack accurate, useful,
and timely financial information and sound controls with which to make
fully informed decisions day-to-day and to ensure ongoing
accountability, which is a primary objective of the CFO Act. It is
therefore important that its financial management initiatives continue
in order to achieve comprehensive and lasting financial management
reform.
IRS also continues to face a significant challenge in strengthening its
enforcement of the nation's tax laws, another challenge that we have
designated as high risk.[Footnote 3] As we have previously reported,
the resources IRS has been able to dedicate to enforcing the tax laws
have not kept pace with the increases it has seen in its enforcement
workload. At the same time, IRS continues to face significant
compliance-related issues, including combating abusive tax shelters and
tax schemes, on which it is placing a high priority. Critical to IRS's
efforts in improving enforcement and, ultimately, taxpayer compliance,
is the need to have current information on the rate of compliance, both
overall and by type of taxpayer. In 2006, IRS completed a study of the
rate of compliance with the nation's tax laws by individuals and some
small business taxpayers, and is in the process of conducting a study
of S-corporations' compliance.[Footnote 4] In October 2007, IRS also
initiated a study of individual income reporting compliance, and has
requested funding for fiscal year 2008 to support multiple,
simultaneous compliance studies, potentially including corporate
taxpayers, partnerships, employment taxpayers, or tax-exempt entities.
However, until such studies have been conducted, and the results
analyzed, IRS will lack current information on compliance rates.
Additionally, the continued lack of reliable cost-benefit information
and a systematic, agencywide strategy to effectively employ it will
hamper IRS's ability to make the most effective use of the information
acquired during such efforts to enable IRS to better fulfill its
mission.
The accompanying report also discusses other significant issues that we
identified in performing our audit that we believe should be brought to
the attention of IRS management and users of IRS's financial
statements.
We are sending copies of this report to the Chairmen and Ranking
Members of the Senate Committee on Appropriations; Senate Committee on
Finance; Senate Committee on Homeland Security and Governmental
Affairs; Subcommittee on Taxation and IRS Oversight, Senate Committee
on Finance; House Committee on Appropriations; House Committee on Ways
and Means; and House Committee on Oversight and Government Reform. We
are also sending copies of this report to the Chairman and Vice
Chairman of the Joint Committee on Taxation, the Acting Commissioner of
Internal Revenue, the Director of the Office of Management and Budget,
the Chairman of the IRS Oversight Board, and other interested parties.
The report is available at no charge on GAO's Web site at [Hyperlink,
http://www.gao.gov].
This report was prepared under the direction of Steven J. Sebastian,
Director, Financial Management and Assurance, who can be reached at
(202) 512-3406 or s [Hyperlink, sebastians@gao.gov] ebastians@gao.gov.
If I can be of further assistance, please call me at (202) 512-5500.
Contact points for our Offices of Congressional Relations and Public
Affairs may be found on the last page of this report.
Sincerely yours,
Signed by:
David M. Walker:
Comptroller General of the United States:
[End of letter]
Comptroller General of the United States:
United States Government Accountability Office:
Washington, DC 20548:
To the Acting Commissioner of Internal Revenue:
In accordance with the Chief Financial Officers (CFO) Act of 1990, as
expanded by the Government Management Reform Act of 1994,[Footnote 5]
this report presents the results of our audits of the financial
statements of the Internal Revenue Service (IRS) for fiscal years 2007
and 2006. The financial statements report the assets, liabilities, net
position, net costs, changes in net position, budgetary resources, and
custodial activity related to IRS's administration of its
responsibilities for implementing federal tax legislation. The
financial statements do not include an estimate of the amount of taxes
that are owed the federal government but have not been paid by
taxpayers, often referred to as the tax gap,[Footnote 6] nor do they
include information on tax expenditures.[Footnote 7]
In its role as the nation's tax collector, IRS has a demanding
responsibility in collecting taxes, processing tax returns, and
enforcing the nation's tax laws. IRS is a large and complex
organization, adding unique operational challenges for management. IRS
employs tens of thousands of people in its Washington, D.C.,
headquarters, 10 service center campuses, 3 computing centers, and
numerous other field offices throughout the United States. In fiscal
years 2007 and 2006, IRS collected about $2.7 trillion and $2.5
trillion, respectively, in tax payments; processed hundreds of millions
of tax and information returns; and paid about $292 billion and $277
billion, respectively, in refunds to taxpayers.
One of the largest obstacles continuing to face IRS management is the
agency's lack of an effective financial management system capable of
producing the reliable, useful, and timely information IRS managers
need to assist in making day-to-day decisions, which is a primary
objective of the CFO Act. IRS continued to make progress in modernizing
its financial management capabilities, and continued to make strides in
addressing its financial management challenges. IRS nonetheless
continued to confront many of the pervasive internal control weaknesses
that we have reported each year since our first attempt to audit its
financial statements in fiscal year 1992.[Footnote 8] In fiscal year
2007, for the eighth consecutive year, IRS was able to produce
financial statements covering its tax administration and nontax
administrative activities that are fairly stated in all material
respects. However, until IRS resolves the issues affecting the
automated systems it relies on to process the administration of tax-
related transactions, it will continue to be challenged to sustain the
level of effort needed to produce reliable financial statements in a
timely manner.
During fiscal year 2007, IRS continued to make significant progress in
its efforts to address its weaknesses in controls over several critical
areas, including reliability of financial reporting, management of
unpaid tax assessments, collections of unpaid taxes and disbursements
of improper tax refunds, and security over hard-copy taxpayer receipts
and data. For example, IRS separately reported estimated receipts of
Social Security and Medicare taxes in the other accompanying
information to its financial statements, and significantly accelerated
its certification of excise tax receipts to the recipient trust funds.
On the basis of these improvements, we no longer consider these
matters, which have been long-standing components of broader IRS
financial reporting issues, to represent internal control deficiencies.
IRS also continued to enhance the capabilities of its Custodial Detail
Data Base (CDDB), which is intended to ultimately serve as a subsidiary
ledger for IRS's tax administration activities, including tax revenue
receipts, tax refund disbursements, and unpaid tax debt. IRS plans for
CDDB to achieve this goal by linking account information in IRS's
master files[Footnote 9] with its general ledger for tax administration
activities. In fiscal year 2006, IRS implemented the first phase of
CDDB, which primarily consisted of computer programs that analyze and
classify related taxpayer accounts from IRS's masterfile that are
associated with unpaid payroll taxes.[Footnote 10] However, these
programs only had the capability to process less complex accounts
recorded in IRS's masterfiles beginning in August of 2001. During
fiscal year 2007, IRS enhanced CDDB to process a larger percentage of
accounts associated with unpaid payroll taxes. Also, during fiscal year
2007, IRS implemented CDDB programs to begin journalizing tax debt
information from its master files to its general ledger weekly, a first
step in establishing CDDB's capability to serve as a subsidiary ledger
for unpaid tax debt. However, IRS is still unable to use CDDB as its
subsidiary ledger for external reporting, and must continue to use a
labor-intensive, manual compensating process to estimate the year-end
balances of the various categories of unpaid tax assessments to avoid
material misstatements to its financial statements.[Footnote 11] For
example, IRS had to make over $20 billion in adjustments to the year-
end gross taxes receivable balance produced by CDDB as a result of its
manual estimation process for financial reporting. Full operational
capability of CDDB is several years away and depends in part on the
successful implementation of future system releases.
During fiscal year 2007, IRS continued to expand processing of the less
complex individual tax returns through its Customer Account Data Engine
(CADE), the system IRS is implementing to replace its individual master
files. However, because of problems IRS identified during testing,
start-up of the latest release of CADE was delayed and it did not
achieve the level of processing originally planned. According to IRS,
this latest release of CADE did not become fully operational until May
2007, which was about 5 months behind schedule. IRS informed us that it
originally intended CADE to process 33 million tax returns during
fiscal year 2007, which would have been over four times the 7.3 million
tax returns processed by CADE during fiscal year 2006. However, due to
the delay, CADE did not achieve this goal. During fiscal year 2007,
CADE processed 11.2 million tax returns, including 10.9 million tax
refunds totaling $11.6 billion, which represented about 4 percent of
all tax refunds disbursed by IRS in fiscal year 2007. It is unclear
when IRS will be able to rely on CADE to process all individual tax
collections and related tax refunds. In addition, once fully
implemented, CADE is only intended to replace the individual master
files; it is unclear how or when IRS will replace the business master
files.
IRS has made notable progress in using existing management information
as a basis for more informed decisions on collection of unpaid taxes
and payment of tax refunds. However, IRS has not yet developed the
agency-wide cost-benefit information needed to better determine the
optimum level of resources to devote to maximizing collections of
unpaid taxes and minimizing payments of improper tax refunds in the
context of its overall mission and responsibilities, or to develop
related cost-based performance measures to assist in monitoring
progress and adjusting strategies to better address areas of
noncompliance. IRS has developed a cost policy to provide guidance on
managerial cost accounting concepts for the agency and has initiated
cost pilot projects to explore ways to apply its cost information to
its various activities. These actions represent a major step forward
for IRS in its efforts to develop the cost-benefit information it needs
to provide a basis for well-informed management decisions. However, the
results of the cost pilots are not expected until the last quarter of
fiscal year 2008, and how effectively IRS will apply the cost
accounting principles embodied in its new policy remains unclear.
While IRS has made notable improvements throughout fiscal year 2007,
control deficiencies over financial reporting, management of unpaid tax
assessments, and collection of tax revenue and issuance of tax refunds
continued to represent material weaknesses.[Footnote 12] These
weaknesses are caused primarily by IRS's continued reliance on outdated
automated systems to provide the financial information that management
needs to make well-informed decisions, and similar weaknesses and
problems will continue to exist until these legacy systems are
replaced. In addition, we continue to consider issues related to
information security to be a material weakness. The persistent, serious
deficiencies in information security increase the risk that
confidential IRS and taxpayer information will be compromised, and have
serious implications related to the reliability of financial management
information produced by IRS's systems. As IRS continues to increase the
automation of accounting and reporting processes, the need for
effective security over the data these systems process becomes
increasingly more critical. Absent effective information security,
confidential taxpayer records will remain at risk and we, as IRS's
auditors, will continue to be unable to rely on the automated controls
built into these systems to obtain assurance that the reported balances
generated by them are reliable. Opportunities for us to utilize the
types of alternate audit procedures we have applied in the past to
compensate for this condition, such as reviewing comparisons between
automated systems and utilizing remaining hard-copy records, are
diminishing as IRS's modernization efforts progress. If IRS does not
resolve its information security material weaknesses before these
options disappear, it could have serious implications for our ability
to determine whether IRS's financial statements are fairly stated.
Opportunities for further improvement in IRS's financial reporting in
the near term are unclear. IRS has not fully addressed how it will
apply the cost information provided by its Integrated Financial System
to the tax-administration-related transactions, which are processed by
the separate systems that support financial management of IRS's tax
administration functions, including its collection of tax revenue
receipts, disbursement of tax refunds, and identification, management,
and collection of outstanding federal taxes. It is therefore unclear
how or when IRS will acquire the ability to fully measure the cost-
effectiveness of its operational activities or develop related cost-
based performance measures to facilitate informed decision-making by
management, and to more effectively support requests to Congress for
additional resources.
Opinion on IRS's Financial Statements:
IRS's financial statements, including the accompanying notes, present
fairly, in all material respects, in conformity with U.S. generally
accepted accounting principles, IRS's assets, liabilities, net
position, net costs, changes in net position, budgetary resources, and
custodial activity as of, and for the fiscal years ended, September 30,
2007, and September 30, 2006.
However, misstatements may nevertheless occur in other financial
information reported by IRS as a result of the internal control
deficiencies described in this report.
IRS's financial statements include tax revenues collected during the
fiscal year as well as the total unpaid taxes for which IRS and the
taxpayers or courts agree on the amounts owed. Cumulative unpaid tax
assessments for which there is no future collection potential or for
which there is no agreement on the amounts owed are not reported in the
financial statements. Rather, they are reported as write-offs and
compliance assessments, respectively, in required supplemental
information to IRS's financial statements. Also, in conformity with
U.S. generally accepted accounting principles, to the extent that taxes
owed in accordance with the nation's tax laws are not reported by
taxpayers and are not identified through IRS's various enforcement
programs, they are not reported in the financial statements nor in
required supplemental information to the financial statements.
Additionally, in conformity with U.S. generally accepted accounting
principles, tax expenditures represent the amount of revenue the
government forgoes resulting from federal tax law provisions that (1)
allow a special exclusion, exemption, or deduction from gross income,
or (2) provide a special credit, preferential rate, or deferred tax
liability. Tax expenditures are not reported in the financial
statements but rather presented as other accompanying information.
Opinion on Internal Controls:
Because of the material weaknesses in internal controls discussed
below, IRS did not maintain effective internal controls over financial
reporting (including safeguarding of assets) or compliance with laws
and regulations, and thus did not provide reasonable assurance that
losses, misstatements, and noncompliance with laws material in relation
to the financial statements would be prevented or detected on a timely
basis. Our opinion is based on criteria established under 31 U.S.C. §
3512 (c), (d), commonly referred to as the Federal Managers' Financial
Integrity Act of 1982 (FIA), and Office of Management and Budget (OMB)
Circular No. A-123, Management's Responsibility for Internal Control.
Despite its material weaknesses in internal controls and its systems
deficiencies, IRS was able to prepare financial statements that were
fairly stated in all material respects for fiscal years 2007 and 2006.
Nonetheless, IRS continues to face the following key issues that
represent material weaknesses in internal controls:
* weaknesses in controls over the financial reporting process,
resulting in IRS not (1) being able to prepare reliable financial
statements without extensive compensating procedures and (2) having
current and reliable ongoing information to support management decision
making and to prepare cost-based performance measures;
* weaknesses in controls over unpaid tax assessments, resulting in
IRS's inability to properly manage unpaid tax assessments and leading
to increased taxpayer burden;
* weaknesses in controls over the collection of tax revenues due the
federal government and over the issuance of tax refunds, resulting in
lost revenue to the federal government and potentially billions of
dollars in improper tax refund payments; and:
* weaknesses in information security controls, resulting in increased
risk of unauthorized individuals accessing, altering, or abusing
proprietary IRS programs and electronic data and taxpayer information.
These material weaknesses in internal controls may adversely affect any
decision by IRS's management that is based, in whole or in part, on
information that is inaccurate because of these deficiencies. In
addition, unaudited financial information reported by IRS, including
performance information, may also contain misstatements resulting from
these deficiencies. The issues encompassed by these material weaknesses
were reflected in the material weaknesses reported by IRS in its fiscal
year 2007 FIA assurance statement to the Department of the Treasury
(Treasury).
In addition to the material weaknesses discussed above, we identified
one internal control deficiency that although not a material weakness,
represents a significant deficiency in the design or operation of
internal control that adversely affects IRS's ability to meet the
internal control objectives described in this report.[Footnote 13] This
deficiency entails weaknesses in IRS's controls over hard-copy taxpayer
receipts and related information that increase the risk that this
information may be lost, stolen, or compromised. IRS included this
issue as a significant deficiency in its fiscal year 2007 FIA assurance
statement to the Treasury.
We have reported on these material weaknesses and the significant
deficiency in prior audits and have provided IRS recommendations to
address these issues.[Footnote 14] One hundred and forty-four
recommendations were still open as of the date of this report, of which
69 relate to the material weakness in information security. IRS
continues to make strides in resolving these matters. We will follow up
in future audits to monitor IRS's progress in implementing these
recommendations. For more details on these issues, see appendix I.
Compliance with Laws and Regulations:
Our tests of compliance with selected provisions of laws and
regulations disclosed one area of noncompliance that is reportable
under U.S. generally accepted government auditing standards and OMB
guidance. This area relates to IRS not releasing federal tax liens
against taxpayers' property on time.[Footnote 15] Except as noted
above, our tests for compliance with laws and regulations disclosed no
other instances of noncompliance that would be reportable under U.S.
generally accepted government auditing standards or OMB audit guidance.
However, the objective of our audit was not to provide an opinion on
overall compliance with laws and regulations. Accordingly, we do not
express such an opinion. For more details on these issues, see appendix
I.
Systems Compliance with the Requirements of FFMIA:
We found that IRS's financial management systems did not substantially
comply with the requirements of the Federal Financial Management
Improvement Act of 1996 (FFMIA) as of September 30, 2007.[Footnote 16]
Specifically, IRS's systems did not substantially comply with Federal
Financial Management System Requirements (FFMSR), federal accounting
standards (U.S. generally accepted accounting principles), and the U.S.
Government Standard General Ledger (SGL) at the transaction level. Our
conclusion is based on criteria established under FFMIA; OMB Circular
No. A-127, Financial Management Systems[Footnote 17] (which includes
the Joint Financial Management Improvement Program (JFMIP)/OMB series
of system requirements documents); U.S. generally accepted accounting
principles; and the SGL.[Footnote 18]
The issues resulting in IRS's nonconformance with the requirements of
FFMIA relate to the material weaknesses discussed above, and were
reflected in the material weaknesses in IRS's fiscal year 2007 FIA
assurance statement to Treasury. IRS's FFMIA remediation plan details
its planned corrective actions for the weaknesses that render its
financial management systems noncompliant with the requirements of
FFMIA. For more details on these issues, see appendix I.
Consistency of Other Information:
IRS's Management Discussion and Analysis and required supplementary and
other accompanying information contain a wide range of data, some of
which are not directly related to the financial statements. We did not
audit and do not express an opinion on this information. However, we
compared this information for consistency with the financial statements
and discussed the methods of measurement and presentation with IRS
officials. Based on this limited work, we found no material
inconsistencies with the financial statements, U.S. generally accepted
accounting principles, or OMB guidance.
Objectives, Scope, and Methodology:
Management is responsible for (1) preparing the annual financial
statements in conformity with U.S. generally accepted accounting
principles; (2) establishing, maintaining, and assessing internal
control to provide reasonable assurance that the broad control
objectives of 31 U.S.C. § 3512 (c), (d) (FIA) are met; (3) complying
with applicable laws and regulations; and (4) ensuring that IRS's
financial management systems substantially comply with the requirements
of FFMIA.
We are responsible for obtaining reasonable assurance about whether (1)
the financial statements are presented fairly, in all material
respects, in conformity with U.S. generally accepted accounting
principles, and (2) management maintained effective internal controls,
the objectives of which are the following:
* Financial reporting--transactions are properly recorded, processed,
and summarized to permit the preparation of financial statements in
conformity with U.S. generally accepted accounting principles and
assets are safeguarded against loss from unauthorized acquisition, use,
and disposition.
* Compliance with laws and regulations--transactions are executed in
accordance with laws governing the use of budget authority and with
other laws and regulations that could have a direct and material effect
on the financial statements and any other laws, regulations, and
governmentwide policies identified by OMB audit guidance.
We are also responsible for (1) testing compliance with selected
provisions of laws and regulations that have a direct and material
effect on the financial statements and laws for which OMB audit
guidance requires testing, (2) testing whether IRS's financial
management systems substantially comply with the three requirements of
FFMIA, and (3) performing limited procedures with respect to certain
other information appearing in these annual financial statements. For
more details on our methodology and the laws and regulations we tested,
see appendix II.
We did not evaluate all internal controls relevant to operating
objectives as broadly defined by FIA, such as controls relevant to
preparing statistical reports and ensuring efficient operations. We
limited our internal control testing to testing controls over financial
reporting and compliance with laws and regulations. We did not test
compliance with all laws and regulations applicable to IRS. We limited
our tests of compliance to those laws and regulations that had a direct
and material effect on the financial statements or that were required
to be tested by OMB audit guidance that we deemed applicable to IRS's
financial statements for the fiscal years ended September 30, 2007, and
2006. We caution that noncompliance may occur and not be detected by
these tests and that such testing may not be sufficient for other
purposes. We performed our work in accordance with U.S. generally
accepted government auditing standards and OMB audit guidance.
Agency Comments and Our Evaluation:
In responding to this report, IRS agreed that the report fairly
presents its financial management progress and remaining management and
systems challenges. IRS also noted its significant accomplishments in
addressing its financial management challenges, including (1)
implementation of another phase of the CDDB, which created an interface
between CDDB and IRACS for posting summary unpaid assessment and
accrual data to IRACS, (2) improvement in the timely release of liens
to an 88 percent timeliness rate, which represented a 19 percentage
point increase over the timeliness rate in fiscal year 2006, (3)
achievement of a 21 percent increase in the Trust Fund Recovery Penalty
accuracy rate through the use of CDDB, (4) issuing of IRS's first cost
accounting policy, and (5) improvement in its capability to capitalize
or expense assets and properly account for Business Systems
Modernization costs in internal use software.
IRS also recognized the importance of the information security issues
discussed in the material weakness in information security, and noted
certain steps it has taken to address these issues. These steps include
(1) establishing an Office of Privacy, Information Protection, and Data
Security to provide direction and oversight of the security and
protection of sensitive information, (2) developing an integrated
Information Technology Security Schedule and Plan and a comprehensive
security strategy, (3) encrypting all laptop data and tapes used in
electronic data exchanges, and (4) implementing an enterprise anti-
virus internet gateway solution to detect and quarantine malicious
content from invading systems. IRS also recognized that while
challenges remain, it has a solid management team dedicated to
promoting the highest standard of financial management, and will
continue to focus on information security while improving financial
reporting.
The complete text of IRS's response is included in appendix III.
Signed by:
David M. Walker:
Comptroller General of the United States:
November 5, 2007:
[End of section]
Management Discussion and Analysis:
The Internal Revenue Service:
FY 2007 Management Discussion and Analysis At a Glance:
Linda Stiff became Acting Internal Revenue Service (IRS) Commissioner
on September 10, 2007. The Commissioner administers, manages, and
directs the execution and application of the Internal Revenue laws,
along with directing the collection of tax revenue that funds most
federal government operations and public services.
History:
The IRS is one of the oldest bureaus in the United States Government.
Article 1, Section 8 of the Constitution gave the Federal Government
the power to “lay and collect Taxes, Duties, Imposts and Excises, to
pay the Debts and provide for the common Defense and general Welfare of
the United States…” The roots of the IRS go back to the Civil War when
President Lincoln and the Congress, in 1862, established the Bureau of
Internal Revenue and the nation’s first income tax. In 1953, the Bureau
of Internal Revenue name was changed to the Internal Revenue Service
(IRS).
Vision:
The IRS will be a 21st Century agency with the human capital and
technology capabilities to effectively and efficiently collect the
taxes owed with the least disruption and burden to taxpayers.
Organization:
The organizational structure (Appendix A) of the IRS closely resembles
the private sector model, with core business activities organized around
customers with similar needs. The scope of IRS operations includes
collection of individual and corporate taxes, examination of returns,
taxpayer assistance, as well as oversight of the tax exempt
organizations and the Earned Income Tax Credit program, the nation’s
largest federally administered means-tested benefits program.
Operating Divisions:
* Wage and Investment (W&I);
* Small Business and Self Employed (SB/SE);
* Large and Mid-Size Business (LMSB);
* Tax-Exempt and Government Entities (TE/GE).
Employees:
The IRS employs over 100,000 employees.
Location:
The IRS is headquartered in Washington, D.C. The IRS also has employees
located at 748 field offices in all states and territories and some U.S.
embassies and consulates.
IRS FY 2007 Statistics:
Total Revenue Collected: $2.69 trillion;
Total Enforcement Revenue Collected: $59.2 billion;
Total Refunds: $292 billion;
Number of Hits on IRS.gov: 1.35 billion;
Number of Information Reporting Documents Processed: 1.45 billion;
Number of Downloads from IRS.gov: 157 million;
Number of Returns Filed: 235 million;
“Where’s My Refund?” Usage: 32.1 million;
Number of Taxpayers Assisted: 63.3 million;
Number of Returns Filed Electronically: 89.2 million.
Financial Resources:
The IRS FY 2007 budget was $10.6 billion in direct appropriations,
supplemented by $198.8 million in user fee revenue and $73.3 million in
reimbursable resources for a total operating level of $10.9 billion.
Internet:
The IRS provides tax information, taxpayer services, forms, and
publications at [hyperlink, http://www.irs.gov].
“Taxes are the price we pay for living in a civilized society”: US
Supreme Court Justice Oliver Wendell Holmes.
Serving The Nation’’s Taxpayers:
Strategic Plan Framework:
Mission:
Provide America’s taxpayers top-quality service by helping them
understand and meet their tax responsibilities and by applying the tax
law with integrity and fairness to all.
Goals And Objectives:
* Improve Taxpayer Service:
- Improve service options for the tax paying public;
- Facilitate participation in the tax system by all sectors of the
public;
- Simplify the tax process.
* Enhance Enforcement Of The Tax Law:
- Discourage and deter non-compliance with emphasis on corrosive
activity by corporations, high-income individual taxpayers and other
contributors to the tax gap;
- Ensure that attorneys, accountants and other tax practitioners
adhere to professional standards and follow the law;
- Detect and deter domestic and off-shore based tax and financial
criminal activity;
- Deter abuse within tax-exempt and governmental entities and
misuse of such entities by third parties for tax avoidance or other
unintended purposes.
* Modernize The IRS Through Its People, Processes, And Technology:
- Increase organizational capacity to enable full engagement and
maximum productivity of employees;
- Modernize information systems to improve service and enforcement;
- Ensure the safety and security of people, facilities and information
systems;
- Modernize business processes and align the infrastructure support to
maximize resources devoted to frontline operations.
Service + Enforcement = Compliance.
IRS Resources:
Funding by Appropriation:
Enforcement: 44%;
Operations Support: 32%;
Taxpayer Services: 20%;
Business Systems Modernization: 2%;
Health Insurance Tax Credit Administration: 0%;
Other: 2%.
Appropriations (dollars in thousands):
In FY 2007, the Congress implemented a new appropriations structure for
the IRS that realigned resources from its three major operating
appropriations into three new accounts – Taxpayer Services,
Enforcement, and Operations Support. Appropriated funds are shown
below:
* Taxpayer Services [$2,156,988] funds processing tax returns and
related documents, assistance for taxpayers in filing returns and
paying taxes due.
* Enforcement [$4,741,680] funds examination of tax returns,
collection of balances, the administrative and judicial settlement of
taxpayer appeals of examination findings, as well as providing
resources for strengthened enforcement to reduce invalid claims and
erroneous filings associated with the Earned Income Tax Credit (EITC)
program.
* Operations Support [$3,470,882] funds administrative services, policy
management and IRS-wide support. The appropriation also funds staffing,
equipment, and related costs to manage, maintain, and operate critical
information systems that support tax administration.
* Business Systems Modernization [$212,659] funds capital asset
acquisitions of information technology systems to modernize key tax
administration systems.
* Health Insurance Tax Credit Administration [$14,856] funds the
administration of the Health Coverage Tax Credit (HCTC).
* Other: Mandatory Appropriation (Special Funds): User Fees [$167,405]
financed by payment for goods and services provided and Private
Collection Agency [$10,757] collection fees.
How IRS Uses Its Resources:
Compliance Services: 64%;
Filing and Account Services: 30%;
Taxpayer Assistance and Education: 4%;
Administration of Tax Credit Programs: 2%.
Use of Resources:
The Statement of Net Cost reflects the use of IRS resources in
conducting its major programs. The IRS uses a cost allocation
methodology to assign support and overhead costs to each program
described below. The Statement of Net Cost reports the full costs of
these programs in accordance with the Statement of Federal
Financial Accounting Standards No. 4, “Managerial Cost Accounting.”
* Taxpayer Assistance and Education [4%] activities include taxpayer
education and outreach, tax publication issuance and distribution.
* Filing and Account Services [30%] activities include filing tax
returns, maintaining customer accounts, and processing taxpayer
information.
* Compliance Services [64%] activities include pre-filing agreements,
document matching, examination, collection, and criminal investigation
activities.
* Administration of Tax Credit Programs [2%] includes costs for EITC
and HCTC program activities.
The following table shows comparative data on the use of IRS resources
by major programs:
Use of Resources (dollars in thousands):
Taxpayer Assistance and Education:
Fiscal Year 2007: $478,663;
Fiscal Year 2006: $407,599.
Filing and Account Services:
Fiscal Year 2007: $3,640,565;
Fiscal Year 2006: $3,689,626.
Compliance Services:
Fiscal Year 2007: $7,701,812;
Fiscal Year 2006: $7,408,340.
Administration of Tax Credit Programs:
Fiscal Year 2007: $190,881;
Fiscal Year 2006: $191,965.
The Tax Gap:
The gross tax gap is the difference between the total tax imposed on
taxpayers by law for a given tax year and the amount of that tax
liability that is paid on time. The most recent IRS estimate (completed
in 2006) of the gross tax gap is $345 billion for Tax Year 2001.
The net tax gap is currently estimated as follows:
Net Tax Gap:
Gross Tax Gap: $345 billion;
Enforced and Other Late Payments: $55 billion;
Net Tax Gap: $290 billion.
The components of the tax gap are:
Gross Tax Gap:
Underreporting: 82%;
Underpayment: 10%;
Nonfiling: 8%.
In August 2007, the IRS released the report, “Reducing the Federal Tax
Gap: A Report on Improving Voluntary Compliance,” a follow-up to
Treasury’s “Comprehensive Strategy for Reducing the Tax Gap” issued in
September 2006. The report presents the current tax gap activities and
the steps taken to improve compliance. The report:
* Details information on steps being taken to reduce opportunities for
tax evasion, leverage technology, and support legislative proposals
that will improve compliance;
* Presents an outreach approach to ensure all taxpayers understand
their tax obligations;
* Recognizes the importance of having a multi-year research program
to help the IRS understand both the scope of and reasons for non-
compliance.
This report, combined with legislative changes and tax simplification,
will guide IRS efforts to reduce the tax gap.
Fiscal Year (FY) 2007 Performance:
The IRS improved compliance through taxpayer service and enforcement
efforts, with 23 of its 30 performance measures [Footnote 19] meeting
or within 98.5% of the target. In addition, 83% of the measures showed
performance at or above FY 2006 levels. In FY 2007, 75% (9 of 12) of
the Taxpayer Service targets and 78% (14 of 18) of the Enforcement
targets were met or within 98.5% of the target. Detailed information on
performance is contained in this section of the report; Appendix B,
Performance Data; and Appendix C, Explanation of Shortfalls.
FY 2007 was also a record year for collections related to enforcement
activities; over $59.2 billion was collected, a 75% increase over FY
2001.
IRS Enforcement Revenues (dollars in billions):
FY01: $33.8;
FY02: 34.1;
FY03: 37.6;
FY04: 43.1;
FY05: 4.3;
FY06: 48.7;
FY07: 59.2.
The steady increase in enforcement revenue is primarily a result of
concerted efforts by the IRS to detect and deter noncompliance with the
tax code.
In FY 2007, the IRS worked to improve its estimates of noncompliance to
pinpoint areas where taxpayers are not in compliance with federal tax
laws. A reporting compliance study for Subchapter S corporations was
initiated and the examination phase was completed in FY 2007. A Tax Year
(TY) 2006 individual income reporting compliance study began in October
2007. In addition, the IRS updated its workload selection models for TY
2006 using data from prior reporting compliance studies, enabling the
IRS to better leverage limited enforcement resources and reduce the
burden on compliant taxpayers.
The IRS established a set of enterprise-wide long-term goals, which
were approved by the IRS Oversight Board in March 2007. These long-term
goals link to the IRS FY 2005-2009 Strategic Plan and serve as
overarching indicators of achievement of the objectives that support
the IRS’s mission critical programs. These goals include measures of
voluntary compliance, electronic filing, non-revenue enforcement
activity, taxpayer satisfaction, and employee engagement/satisfaction.
Strategic Goal: Improve Taxpayer Service;
Objectives:
* Improve Service Options for the Tax Paying Public;
* Facilitate Participation in the Tax System by All Sectors of
the Public;
* Simplify the Tax Process.
Taxpayer Assistance Facts:
IRS.gov keeps taxpayers current with information they need to file
their tax returns. The “1040 Central” page contains news releases, fact
sheets, and tax tips all designed to keep taxpayers informed of changes
as they happen.
Taxpayers continue to call the IRS and use toll-free services to obtain
answers to their tax law and account related questions. In FY 2007, the
IRS:
* Achieved an 82.1% customer service representative level of service,
meeting the target;
* Answered 33.2 million assistor telephone calls and completed 23.1
million automated calls; and;
* Correctly responded to 91.2% of tax law questions and 93.4% of
account questions received via the telephone.
The IRS also provides toll-free service for customers such as business
and specialty taxpayers, practitioners, international taxpayers, and
the National Taxpayer Advocate.
The IRS provides 5,397 different tax forms, which can be downloaded
from the IRS.gov website. In FY 2007, 72.5 million forms were
downloaded by taxpayers. Each year, the IRS also mails out tax forms to
individual and business taxpayers. In FY 2007 the number of forms
mailed was 112 million. Many forms are available for Spanish language
taxpayers. In FY 2007, 47 different forms were available in Spanish.
Improve Taxpayer Service:
Helping taxpayers understand their tax reporting and payment
obligations is the cornerstone of taxpayer compliance. In FY 2007, 75%
(9 of 12) of the Taxpayer Service performance targets were met or
within 98.5% of the target. The remaining three measures fell within
95% of the target. Improved service options for taxpayers and
simplifying the tax process are key strategies for improving service.
The IRS continued to make improvements in key services for taxpayers in
FY 2007. Assisting taxpayers with their tax questions before they file
their returns addresses inadvertent non-compliance and reduces
burdensome post-filing notices and other correspondence from the IRS.
The IRS provides assistance to millions of taxpayers through toll-free
call centers, the IRS.gov website, Taxpayer Assistance Centers,
Volunteer Income Tax Assistance, and Tax Counseling for the Elderly
sites.
In addition, developing and maintaining relationships with IRS
stakeholders and partners in tax administration has become a key
strategy in developing and distributing tax information to our
customers. By augmenting and opening these avenues of communication,
the IRS is able to quickly identify and respond to emerging issues in
tax compliance and to more efficiently provide education and outreach
to a wider population of taxpayers to improve compliance.
More taxpayers are interacting with the IRS through the IRS.gov
website. Information available on-line has improved customer
satisfaction because of its speed, accessibility, and accuracy. For
example:
* More than 1.35 billion web pages were viewed on IRS.gov, an increase
of 3.8% over 2006;
* More than 32.1 million taxpayers used “Where’s My Refund?,” an
increase of 30% over 2006;
* 443,558 taxpayers used the new sales tax deduction calculator
developed for the 2007 filing season. The calculator helped taxpayers
determine the correct amount of optional general sales tax they were
eligible to claim; and;
* The popular IRS website, IRS.gov, received an overall customer
satisfaction score of 74 based on a 100 point scale as measured by the
American Customer Satisfaction Index (ACSI). This represents a five
point increase over the 2005 filing season score, which can be
attributed to the redesign of IRS.gov making information easier for
taxpayers to find. The increased score places IRS.gov among the better
performing Federal websites.
Taxpayer Assistance Blueprint (TAB):
TAB represents the most extensive IRS research conducted on the needs,
preferences, and behaviors of taxpayers and partners who assist them in
complying with the tax laws. The Phase 1 TAB Report issued in FY 2006
focused on research and key strategic improvement themes.
The IRS delivered the Phase 2 Report to Congress on April 11, 2007. The
report included the TAB Strategic Plan, and the recommendations focused
on specific categories of work and services.
The IRS established a Taxpayer Services Program Management Office and
IRS Services Committee to formalize integrated service investment
decision-making.
Significant Insights Revealed:
* The majority of taxpayers who used IRS assistance indicated a
willingness to use electronic services;
* Fewer customers visit Taxpayer Assistance Centers relative to
other options such as phone and correspondence;
* Taxpayers are most concerned with first contact resolution;
* 9 out of 10 taxpayers using IRS services in 2005 reported they
would use the same methods again.
Next Steps:
* Continue TAB Strategic Plan integration in planning and budgeting
processes. Implement service improvement initiatives and future
research projects identified by the TAB Strategic Plan, which were
incorporated into the FY 2008 Budget Submission.
* Implement Multi-year Research Portfolio by making service-related
decisions based on taxpayer data.
* Develop new measures for compliance, taxpayer, partner, and
government value.
* Continue solicitation of stakeholder and employee input.
Highlights of the 2007 Filing Season:
The IRS delivered a successful 2007 filing season even with addressing
new challenges associated with the implementation of the Telephone
Excise Tax Refund (a one-time payment designed to refund long distance
telephone taxes), introducing split refund capability, which provided
taxpayers with more control over their refunds by allowing direct
deposit of a refund to up to three financial accounts, and making the
necessary changes to forms and systems to accommodate late passage of
provisions of the Tax Relief and Health Care Act of 2006. Results of
the 2007 filing season include:
* Processed more than 139.7 million individual returns and issued more
than 105.5 million refunds totaling $261 billion;
* Maintained a telephone level of service of 82.1% while answering 33.2
million calls;
* Served over 7 million taxpayers at 401 Taxpayer Assistance Centers;
* Increased electronic filing:
- Individual returns electronically filed reached 57.1%, up from 54.1%
in 2006;
- Business returns electronically filed reached 19.1%, up from 16.6% in
2006;
- Home computer filing increased to 22.5 million returns, an 11%
improvement over 2006;
- Tax professional use of e-file increased to 57.2 million
returns or 10% over 2006; and;
- More than 4.1 million taxpayers used the free services offered by the
Free File Alliance.
Customer satisfaction of individual tax return filers increased from a
score of 64 in 2005 to 65 in 2006 based on the ACSI - 100 point scale.
Over 83,000 taxpayer returns requested the split refund option. The
capability to split refunds in the 2007 filing season provided
individual taxpayers with a new option of choosing direct deposit for
depositing their tax refunds. All taxpayers who filed using any of the
1040 series forms had the option to divide their refunds in up to three
financial accounts including individual retirement accounts, over 500
college savings plans, savings bonds, or a variety of other accounts.
More than 1,000 revisions affecting 137 of the 164 filing season
products used by taxpayers were made with minimal impact to the filing
season. For the second year in a row, the IRS responded quickly to late-
in-the-year passage of tax legislation. Due to the late passage of
provisions of the Tax Relief and Health Care Act of 2006, the IRS had
to quickly make changes to the processing systems and create or revise
forms to allow taxpayers to take advantage of the Act’s provisions.
Telephone Excise Tax Refund (TETR):
The IRS successfully implemented TETR, a one-time payment available on
federal income tax returns to refund previously collected long distance
telephone taxes. The integrated approach included:
* Using regular IRS income tax processing channels and existing income
tax forms by adding a line for TETR on every form;
* Developing a method for claiming the credit using a standard amount
for individuals and an estimation formula for businesses;
* Reprogramming major filing systems to process the TETR credit with
the filing of individual tax returns;
* Creating a new form for individuals without an income tax filing
requirement to claim the credit;
* Implementing an extensive communication strategy that focused on
education, maximizing media reach, and publicizing compliance issues.
For the 2007 filing season, the IRS issued 22 news releases, 8 “Tax
Tips,” and messages included in over 4,000 articles related to taxes
and tax filing. To further assist taxpayers and the practitioner
community, the IRS launched a TETR web page on IRS.gov that was viewed
by more than 4.5 million people.
Successful delivery of the integrated TETR approach enabled the filing
of over 94 million 2006 federal income tax returns, which claimed more
than $4.81 billion in telephone excise tax refunds.
In addition, the IRS prevented more than $40 million in erroneous
refunds through in-depth analysis of TETR claims and split refund
requests. The comprehensive approach to administering this refund
allowed the IRS to successfully meet taxpayer and stakeholder
expectations.
Taxpayer Outreach:
The IRS enhanced its outreach and educational services through
partnerships between the IRS and public organizations. Outreach
involves direct contact with customers through IRS participation at
conferences, seminars, and workshops or indirect contact with customers
through newsletters, websites, and customer partnerships.
The IRS partners with partner organizations such as state taxing
authorities and volunteer groups to serve taxpayer needs. Through its
11,922 Volunteer Income Tax Assistance and Tax Counseling for the
Elderly sites, the IRS provided free tax assistance to the elderly,
disabled, and limited English proficient individuals and families. The
76,619 volunteers located at the sites filed approximately 2.63 million
returns, a 14% increase over FY 2006.
The IRS established 16 new low income tax clinics (LITC) in rural areas
to help taxpayers who cannot afford representation obtain competent
assistance in meeting their obligations. LITCs reduce taxpayer
uncertainty and errors by clarifying taxpayer rights and
responsibilities, and through their outreach efforts, offer effective
information and education.
The Earned Income Tax Credit (EITC) is a refundable Federal income tax
credit for low-income working individuals and families. The IRS
improved services for EITC participants through the following actions:
* Developed a three-point plan expanding outreach initiatives and
identified ways to simplify and improve forms and make IRS.gov more
user friendly;
* Held a Nationwide EITC Awareness Day to increase awareness of the
EITC among eligible taxpayers, especially those with limited English
proficiency;
* Developed outreach products and strategies to reach and increase
participation among the underserved EITC populations, such as Hispanic
and rural communities; and;
* Increased partnerships with community-based organizations dedicated
to assisting taxpayers with financial literacy, return preparation and
tax return filing. As a result, the IRS increased outreach by 15% and
return preparation by 18% over FY 2006.
Strategic Goal: Enhance Enforcement Of The Tax Law:
Objectives:
* Discourage and Deter Non-Compliance with Emphasis on Corrosive
Activity by Corporations, High-Income Individual Taxpayers and Other
Contributors to the Tax Gap;
* Ensure that Attorneys, Accountants and Other Tax Practitioners Adhere
to Professional Standards and Follow the Law;
* Detect and Deter Domestic and Off-Shore Based Tax and Financial
Criminal Activity;
* Deter Abuse within Tax-Exempt and Governmental Entities and Misuse of
such Entities by Third Parties for Tax Avoidance or Other Unintended
Purposes.
Enforcement Facts:
Enforcement authority is used to collect the taxes that are due from
people who do not fulfill their tax obligations. Non-compliance may
not be deliberate and can stem from a wide range of causes, including
lack of knowledge, confusion, poor record-keeping, differing legal
interpretations, unexpected personal emergencies, and temporary cash
flow problems. However, some noncompliance is willful, even to the
point of criminal tax evasion.
Efforts to minimize the burden for compliant taxpayers support the
overall goal of full participation in the tax system.
The IRS Oversight Board conducts an annual survey to gain deeper
understanding of taxpayer’s attitudes. The 2007 results showed:
* 84% of survey participants thought it was not at all acceptable to
cheat on your income taxes;
* 89% of survey participants agreed that everyone who cheats should
be held accountable.
Enhance Enforcement of the Tax Law:
Potential for narrowing of the nation’s tax gap hinges primarily on IRS
efforts to improve compliance with U.S. tax laws. IRS enforcement was
within 98.5% of the target for 78% (14 of 18) of its program targets.
Highlights of Enforcement Performance:
IRS examination and collection programs targeted a wide range of
contributors to the tax gap and, in FY 2007, the IRS showed steady
progress, building on the FY 2006 successes:
* Increased enforcement revenue 22%;
* Increased high-income taxpayer audits 29%;
* Increased individual audits 8%;
* Increased small business audits 17%, and corporate
audits 3%; and;
* Increased collection case closures 12%, and dollars
collected 13%.
Maintaining a strong enforcement presence in the tax-exempt and
governmental sectors (including religious, charitable, social,
educational, political, and other not-for-profit organizations, as well
as employee pension plans and tax-exempt bonds) is particularly
important given the role that a small number of these entities play in
accommodating abusive transactions entered into by taxable parties. In
FY 2007, the IRS expanded its enforcement presence including:
* Increased enforcement contacts 12% over FY 2006
levels; and;
* Conducted reviews of executive compensation practices among tax-
exempt organizations and initiated a new phase of the project to
address loans to officers.
The IRS continued to investigate significant tax, money laundering, and
other financial activities that adversely affect tax administration.
The IRS also took steps to combat fraudulent and financial crime
schemes identified through improved case development efforts and
partnership with other law enforcement agencies. Performance levels for
the criminal investigation program remained high in FY 2007:
* Completed criminal investigations totaled 4,269, exceeding the target
of 4,000;
* Maintained a conviction rate of over 90%;
* Increased acceptance rate by the Department of Justice to 94.6%,
higher than the FY 2006 rate of 92.2%, and the acceptance rate by the
U.S. Attorney increased to 90.2%, 2% higher than the 88.3% achieved in
FY 2006;
* Obtained over 2,155 convictions, exceeding the 2,069 target; and;
* Stopped fraudulent claims in excess of $1 billion through IRS Fraud
Detection Centers.
The IRS also developed the Compliance Resolution Program and strategies
to advance compliance goals and minimize burden on taxpayers. This
Compliance Resolution Program partners with external stakeholders in
order to address a specific tax issue that arose from the American Jobs
Creation Act of 2004 regarding the treatment of taxes due by employees
who exercised specific stock rights. The IRS permitted employers to
voluntarily pay certain taxes and interest for employees who exercised
certain discounted stock options and stock appreciation rights in 2006.
In FY 2007, 78 employers participated in the Compliance Resolution
Program with $116.3 million received.
In the tax exempt sector, new outreach initiatives included:
* Launching [hyperlink, http://www.stayexempt.org], a popular tax
compliance website for exempt entities and providing new web-based
tools to help tax-exempt entities understand their federal tax
requirements; and;
* Conducting workshops to assist remote tribal villages in
understanding federal and state employment tax and other reporting
requirements.
Compliance Assurance Process (CAP) Pilot Program:
Under this pilot program, the IRS works with large business taxpayers
to identify and resolve issues prior to return filing, which provides a
high level of certainty to taxpayers that corporate tax returns are
substantially compliant when filed.
Currently 78 taxpayers have participated in the CAP program.
Compliance Assurance Process (CAP) Participation (Cumulative):
TY 2005: 17;
TY 2006: 34;
TY 2007: 78.
The CAP program benefits both the IRS and the taxpayer by fostering
compliance, reducing the time it takes to process a return, and
improving both customer and employee satisfaction while maintaining
a high level of quality.
From the taxpayers’ perspective, CAP represents improvements to
their internal business processes as corporate tax departments interact
with the IRS on a real-time basis. CAP allows emerging compliance
issues to be identified and addressed much sooner than the traditional
IRS audit process would allow.
CAP offers many other benefits:
* Communication about completed transactions occurs sooner and allows
for an analysis of material items affecting the tax return;
* Immediate review of transactions after completion, while knowledgeable
personnel and necessary records are most accessible;
* Compliance issues in need of resolution are identified early.
Globalization of Tax Administration:
In FY 2007, the IRS reorganized its international organization to
better address the increasing scope of international tax administration
where non-compliance is a significant and growing problem. In addition,
the IRS developed a comprehensive strategy to identify and highlight
activities that will improve customer service, enhance international tax
compliance, and modernize the IRS to more effectively keep pace with
globalization.
The exchange of information between a foreign revenue agency and the
IRS led to the recent unraveling of an abusive cross-border tax scheme
involving hundreds of taxpayers and tens of millions of dollars in
improper deductions and unreported income. In late 2007, the Joint
International Tax Shelter Information Centre (JITSIC) will open a second
office in London and the Japanese National Tax Agency will join. JITSIC
shares information and expertise in identifying and curbing tax
avoidance and shelters. As collaboration between member countries
continues to grow, more crossborder schemes will be uncovered, shared,
and addressed.
Tax Shelter and Promoters and Abusive Tax Initiatives:
The IRS continues to deter tax shelter abuse and tax scheme promoters
through targeted audits, aggressive litigation, and publicity.
Tax Shelter Promoter Program:
The IRS made significant progress in resolving civil matters with
promoters of abusive and listed tax shelter transactions. In addition
to large penalty assessments and public admissions of regrettable
behavior by businesses and some of their former employees, the IRS is
obtaining future compliance agreements from promoters. For FY 2007,
penalties assessed and collected from the Promoter program totaled
nearly $69 million.
Tax Preparer and Promoter Activities:
The IRS continues to investigate and prosecute preparers involved in
criminal activity. Many taxpayers rely on the advice and counsel
provided by a tax preparer to fulfill their tax responsibilities. The
IRS is engaged in ensuring tax preparers and promoters are working
within the frame of the tax code. The IRS is targeting preparers whose
tax work indicates questionable return preparation practices and/or
disseminating questionable advice or promoting questionable tax
avoidance strategies.
Abusive Tax Avoidance Initiatives:
The IRS focused its efforts to combat abusive tax avoidance transactions
(ATAT) by providing early guidance, addressing shelters at the promoter
level, and increasing the strength of the IRS response. The IRS will
continue to aggressively address abusive transactions through enhanced
identification techniques, published guidance, traditional examination
processes, alternative dispute resolutions, communication, and resource
allocation.
Productivity Improvements:
The IRS continued to improve quality, efficiency, and service delivery
through a wide-range of initiatives designed to increase service
coverage to taxpayers and increase productivity. Improvements in
workload selection techniques, streamlining and centralizing work
processes, focusing on case quality and the use of embedded quality
reports, decreasing cycle time, and increasing managerial involvement
in casework were all factors contributing to IRS productivity
improvements.
The IRS substantially enhanced its productivity by implementing
technological and process improvements in the Automated Underreporter
(AUR), Examination, and Compliance Services Collection Operations.
Significant improvements made in FY 2007 included:
* Implemented a new AUR case selection and scoring methodology for
individuals, resulting in a 20.5% increase in AUR assessments;
* Controlled and directed incoming Examination toll-free calls through
an Intelligent Call Management system resulting in a 6.1% increase in
the service level; and;
* Automated the processing of over 43% of installment agreement problem
cases, which freed resources to process additional installment
agreement compliance work.
The IRS continued to reengineer its examination and collection
procedures to reduce time, increase yield, and expand coverage.
Emphasizing early identification of tax liabilities through increased
audits and more focused collection activities, the IRS undertook the
following actions:
* Piloted new Automated Substitute for Return screening and batching
procedures, with the increased efficiencies resulting in a productivity
improvement of over 156%, from 7.5 cases per hour to 19.2 cases per
hour;
* Increased detection of fraudulent activities and increased the number
of recommendations for civil fraud penalties by 49% over the prior year
level; and;
* Developed an Employment Tax Strategy that includes
eliminating/reducing overlaps and gaps in processes to enhance
organizational effectiveness; expanding work relationships with federal
and state authorities; conducting studies to better understand the tax
gap; and assessing new ways to impact taxpayer behavior.
Strategic Goal:
Modernize the IRS through its People, Processes, and Technology:
Objectives:
* Increase Organizational Capacity to Enable Full Engagement and
Maximum Productivity of Employees;
* Modernize Information Systems to Improve Service and Enforcement;
* Ensure the Safety and Security of People, Facilities and Information
Systems;
* Modernize Business Processes and Align the Infrastructure Support to
Maximize Resources Devoted to Front-line Operations.
BSM Project Schedule Accomplishments:
Met: 77%;
Not Met: 23%.
BSM Project Cost Accomplishments:
Met: 92%;
Not Met: 8%.
Modernization Facts:
* The IRS maintains over 290 million individual and business taxpayer
accounts;
* The IRS processes up to 624 million real-time transactions per month;
* The IRS has over 400 automated systems and maintains over 72 million
lines of code.
Modernize the IRS through its People, Processes, and Technology:
The increased reliance on technology and its impact on business
processes and the ability to maintain a talented workforce are
positively changing how IRS employees conduct business and deliver
services. The IRS delivered the majority of major project milestones
within the target of +/- 10% variance for cost and schedule, a
significant achievement that continues to validate Business Systems
Modernization (BSM) program management effectiveness.
Business Systems Modernization (BSM):
For the third year in a row, the IRS made substantial progress in
meeting project deliverables and has continued to build foundational
processes, controls and governance that are essential to continued
success in managing the complex system development efforts. In FY 2007,
the IRS implemented a new governance structure for its information
technology (IT) investment projects. The new structure facilitates the
ability to identify and address project-related issues and risks,
ensuring IT investment projects deliver required results. Project-level
accountability and decision making are promoted for projects that do
not have problems or issues, while the new governance model specifies
appropriate thresholds for elevating project-related issues that may
arise.
The IRS also developed a five-year IT Modernization Vision and Strategy
that addresses priorities for modernizing frontline tax administration
functions. The strategy guides IT investment decision making for 2007
and beyond. Important aspects include: establishing partnerships among
IT and business leadership; leveraging existing systems; emphasizing
the delivery of smaller, incremental releases; and unifying the
portfolio-level view of investments.
Notable modernization accomplishments for FY 2007 include:
* Delivered new Customer Account Data Engine (CADE) filing
capabilities, enabling CADE to process over 11 million returns and
issue refunds of $11.6 billion; and;
* Added new capabilities to the Modernized e-File (MeF) system that
allowed the receipt of electronically filed Partnership Returns (Forms
1065 & 1065B), meeting the mandate for taxpayers with 100 or more
partners to file electronically. MeF received over two million
corporate, non-profit, and partnership forms for processing.
* Deployed the first two releases of the Accounts Management Services
(AMS) system which is designed to enable authorized users to resolve
taxpayer issues by accessing integrated account data. AMS builds the
applications and databases that enable IRS employees to use the data in
CADE to facilitate faster, more accurate issue resolution and results
in quick and accurate access to authoritative account information in
response to customer inquiries. AMS delivered functionality to provide
daily rather than weekly updates to the authoritative account and began
the Domain Architecture which will describe the business vision and
supporting conceptual technical architecture that will drive AMS
releases for the next five years.
In addition to the key modernization projects, several initiatives and
improvements were undertaken in 2007 to effectively integrate the
systems with the legacy production environment, and to improve the
technology infrastructure. New and improved processes were also put in
place to better integrate business and technology strategies, and to
allow the IRS to operate more efficiently with improved productivity.
* Institutionalized the use of the Enterprise Architecture into the
Modernization Vision and Strategy process where the IRS received the
prestigious E-Gov award as the Best Civilian Agency to use the
Enterprise Architecture for Government Business Transformation.
* Completed the Enterprise Service Oriented Architecture strategy and
established the process to identify Enterprise Common Services in order
to achieve operation excellence and cost savings.
* Delivered high-priority portal platform improvements and stabilized
operations to meet near term needs for the 2007/2008 filing seasons for
tax practitioners and internal IRS users.
* Integrated the Enterprise Application Integration Broker into the
core infrastructure to enable the use of common services to leverage
data and applications between legacy and modernized environments.
* Expanded the Infrastructure Center of Excellence to include
configuration management, measurement and analysis, capacity planning
and performance engineering, and project monitoring and control.
Expansion of Mandatory Corporate Modernized e-File (MeF):
Corporations with assets over $50 million that file 250 or more returns
annually were required to electronically file their Form 1120 or 1120S
tax return for tax years ending on or after December 31, 2005. For tax
years ending on or after December 31, 2006, the asset threshold was
reduced to $10 million.
The IRS worked extensively with stakeholder groups throughout the
implementation of the e-file mandate to address impediments to e-filing.
As a result, most corporations required to e-file complied with the
mandate.
For filing year 2006, 11,000 large corporations with more than $50
million in assets were required to efile. Ultimately, more than 15,000
large corporations electronically filed including more than 4,000 large
corporate taxpayers who voluntarily e-filed during 2006.
To ensure the successful expansion of its business e-file program, the
IRS established an E-Filing Project Office to work with external and
internal stakeholders, address e-file issues, and monitor taxpayer
compliance with the corporate e-file mandate. In filing year 2007, more
than 16,900 corporate taxpayers efiled their returns.
For FY 2007, new MeF capabilities allowed the receipt of electronically
filed Partnership Returns (Forms 1065 and 1065B), meeting the mandate
for taxpayers with 100 or more partners to file electronically. MeF
received over 2 million corporate, non-profit, and partnership forms
for processing.
The expansion of business e-file promotes a more efficient and timely
filing process.
Protection of Sensitive Information/Information Technology (IT)
Security:
Security of infrastructure and IT systems remains a top priority for
the IRS. In FY 2007, the IRS continued to update its systems, processes,
and training efforts to ensure taxpayer information is properly
safeguarded. The IRS completed all required Federal Information
Security Management Act activities; contingency plan testing on the 260
applications and systems on the master inventory; and live disaster
recovery testing for all major applications. The IRS also established
new offices and governing bodies to provide direction and oversight
regarding the security and protection of sensitive information.
The IRS security effort to protect sensitive information included:
* Installed automatic full disk encryption on all of the total deployed
inventory of over 50,000 IRS laptops;
* Implemented a secure electronic online solution for data exchanged
with federal, state, and other partners;
* Updated employee required online training courses with the most
recent policy guidance and employee responsibilities related to the
protection of sensitive information and the use of encryption tools;
* Deployed mandatory information protection training for all IRS
employees and contractors having access to sensitive information;
* Issued updated data protection policies, processes, and education
training tools to improve employee awareness and skill levels;
* Deployed upgraded firewall intrusion detection devices.
Human Capital:
Workforce planning is a significant challenge. With a diverse
population of more than 100,000 employees and more than 700 locations
across the country, the IRS works continuously to ensure that its
employees are in the right place at the right time and have the skills
and competencies needed to accomplish the IRS mission.
In FY 2007, the IRS continued to hire and train candidates to fill key
mission critical occupations:
Mission Critical Occupation: Revenue Agents;
FY 2007 Targeted Staff Level: 12,691;
Met: [Check].
Mission Critical Occupation: Special Agents;
FY 2007 Targeted Staff Level: 2,672;
Met: [Check].
Mission Critical Occupation: Tax Examiners & Tax Compliance Officers;
FY 2007 Targeted Staff Level: 11,656;
Met: within 98% of target.
Mission Critical Occupation: Revenue Officers;
FY 2007 Targeted Staff Level: 5,675;
Met: within 95% of target.
Continuing to use enforcement resources effectively while recruiting,
hiring, and developing new and existing talent to meet the demands of
the future resulted in a consistent increase in enforcement revenue
over the past four years.
In FY 2007, the IRS established Human Capital outcome indicators of
talent, performance culture, leadership, and knowledge management to
assess how well it is strategically managing human capital to achieve
the IRS mission. For example, to meet changing business and
technological demands, the IRS initiated a program to identify targeted
occupations, skill sets, and hard-to-fill positions. The program
features integration of all recruitment, hiring, and compensation
efforts, along with the development of new and improved methods of
predicting future attrition through retirements. Developing activities
specifically targeted toward mitigating the impact of retirements as
well as attracting and retaining new hires with advanced skills
continues to be critical to the successful delivery of IRS business
goals.
The IRS continued to work on development of a human capital strategy in
FY 2007. The strategy includes bringing critical personnel on board and
includes objectives for employee training, leadership development, and
workforce retention. Actions taken in FY 2007 included:
* Established a Center of Excellence Office to determine the skills and
competencies for each area of expertise; and;
* Developed training requirements and a new recruitment strategy.
Future efforts are aimed at synchronizing the hiring of new staff with
the retirement of older staff such that adequate knowledge transfer
occurs.
OMB Circular A-123, “Management’s Responsibility for Internal Control”:
The IRS conducted the required evaluation of the effectiveness of its
internal control over financial reporting in accordance with Appendix A
of OMB Circular A-123.
For FY 2007, the IRS conducted the following A-123 activities:
* Tested 35 transaction processes material to Treasury’s Consolidated
Financial Statements, including:
- 29 administrative processes related to $10 billion in administrative
transactions;
- 6 custodial tax-related processes related to $2.69 trillion in tax
revenues;
* Reviewed controls over the IRS’s financial reporting, specifically
Treasury Information Executive Repository reporting;
* Conducted a self-assessment of the internal control environment using
the Government Accountability Office’s (GAO’s) abbreviated Internal
Control Evaluation Checklist;
* Reviewed IRS compliance with applicable laws and regulatory
requirements regarding financial reporting and internal control;
* Reviewed GAO and Treasury Inspector General for Tax Administration
audit reports and findings.
Based upon the results of the evaluation, the IRS provided qualified
assurance that its internal controls were operating effectively.
The qualified assurance is based on the condition of four material
weaknesses reported by GAO in the IRS's FY 2006 and FY 2005 audited
financial statements. GAO, however, acknowledged the development of
compensating procedures to produce financial statements that are
fairly stated and issued an unqualified opinion.
In May 2007, GAO reported on the IRS’s FY 2006 A-123 testing noting
that the IRS appropriately planned and implemented its first-year
assessment.
Systems Controls and Legal Compliance:
The IRS continued to enhance financial management and appropriate
controls that are an integral component of all IRS programs.
Federal Managers’ Financial Integrity Act (FMFIA):
During FY 2007, the IRS complied with the internal control requirements
of FMFIA, the Office of Management and Budget (OMB) Circular A-123, and
the Reports Consolidation Act of 2000. The IRS organizations operated
in accordance with the procedures and standards prescribed by the
Comptroller General and OMB Guidelines.
The systems of management control for the IRS organizations are
designed to ensure that:
* programs achieve their intended results;
* resources are consistent with the overall mission;
* programs and resources are free from waste, fraud, and
mismanagement;
* laws and regulations are followed;
* controls are sufficient to minimize improper and erroneous
payments;
* performance information is reliable;
* system security is in substantial compliance with all relevant
requirements;
* continuity of operations planning in critical areas is sufficient to
reduce risk to reasonable levels; and;
* financial management standards are in compliance with Federal
financial systems standards, i.e., FMFIA Section 4 and Federal
Financial Management Improvement Act (FFMIA).
Because the IRS has open material weaknesses and the financial
management systems do not substantially comply with the FFMIA, the IRS
provides qualified assurance that the above listed systems of
management control objectives were achieved by the IRS during FY 2007.
This assurance is provided relative to Sections 2 and 4 of FMFIA. The
material weaknesses are:
* Improve Modernization Management and Processes;
* Earned Income Tax Credit (EITC) Non-Compliance;
* Computer Security;
* Financial Accounting of Revenue – Custodial.
Federal Financial Management Improvement Act (FFMIA):
The IRS has made significant progress bringing financial management
systems into compliance with FFMIA. During FY 2007, the IRS implemented
a new interface between the Custodial Detail Data Base (CDDB) and the
Interim Revenue Accounting Control System to create a summary of unpaid
assessment and accrual data.
Lien Release Non-Compliance Issue:
As of September 30, 2007, the IRS did not consistently comply with
section 6325 of the Internal Revenue Code regarding the timely release
of federal tax liens. The IRS Financial and Management Controls
Executive Steering Committee (FMC ESC) monitors the action plan which
addresses issues identified by the IRS, Government Accountability
Office (GAO), and the Treasury Inspector General for Tax Administration
(TIGTA).
Property and Equipment:
GAO concluded in the report on the IRS’s FY 2006 and FY 2005 Financial
Statements that Property and Equipment (P&E) accounting records no
longer constitutes a reportable condition. However, the IRS continued
to strengthen internal controls and procedures that enhanced its
ability to account for P&E. Specifically, the IRS revised the dollar
threshold for review of P&E accounting transactions and conducted
intensive reviews of the large dollar transactions increasing the
accuracy of P&E reporting. The IRS improved its capability to
capitalize assets or expense other items and properly account for
Business System Modernization costs in internal use software.
Federal Information Security Management Act (FISMA):
In accordance with the requirements of FISMA, the IRS took actions to
establish a stronger agency-wide information security program due to
the IRS's Computer Security Material Weakness:
Actions: Certification and Testing of systems;
Status: Two thirds complete [1].
Actions: Systems Accreditation;
Status: 98% Approved.
Actions: Specialized training;
Status: 99% of Employees.
Actions: Annual Awareness Training;
Status: 99% of Employees and Contractors.
Actions: Contractor Systems Reviews;
Status: 100%.
Actions: Annual Security Controls Testing;
Status: 100%.
Actions: Annual IT Contingency Plan Testing;
Status: 100%.
Actions: Privacy Impact Assessment;
Status: 100%.
Actions: System of Record Notice;
Status: 100% compliance.
[1]The final one-third will be completed in 2008.
[End of table]
* The IRS certification program is in the third year of a three year
cycle to certify all IRS reported systems. There are 260 systems
operating under a full Authority to Operate (ATO), 4 with an Interim ATO
(IATO), and 2 certifications are currently in progress. For all ATO
and IATO Systems, Security Test and Evaluations are documented in a
Plan of Action and Milestones.
* Maintained the 24 X 7 incident response center to monitor IRS
computer and network security, and created a second center to provide
back-up capabilities.
* Completed all required FISMA activities contingency plan testing on
all of the 260 applications/ systems on the master inventory and live
disaster recovery tests for all major applications.
The IRS's strategy is to implement an enterprise-wide risk management
approach that cost-effectively focuses resources on major systems and
assets supporting tax administration.
Reports Consolidation Act of 2000:
The IRS provided assurance that its critical performance measures are
reliable. Internal Revenue Manual 1.5, “Managing Statistics in a
Balanced Measurement System Handbook,” provides a detailed template
that documents each measure’s definition, formula, reliability, and
reporting frequency. These controls ensure that the data is consistently
and accurately collected over time.
Continuity of Operations (COOP):
IRS leaders practiced scenarios during the annual COOP exercise to make
sure the IRS could sustain operations after a catastrophic event.
Scenarios included: workplace violence; weather disasters;
international, domestic, and cyberterrorism; and blackouts.
Months of intricate planning and extensive logistical coordination were
conducted to prepare for the realistic, one to two-day drills. Practice
scenarios involved computer hackers penetrating information systems,
bombs, explosions or shootings at offices, and floods or weather-related
destruction. IRS executives reviewed the results of each exercise to
learn where the IRS could make necessary changes to strengthen its
overall plan. Other important practice activities like simulation
exercises and tests of individual business resumption plans took place
on a smaller scale.
Major Management Challenges and High-Risk Areas:
Over the last several years, GAO, TIGTA, and the Office of Inspector
General for Treasury have identified several Management Challenges and
High-Risk areas facing the IRS. In FY 2007, TIGTA reorganized the
challenges by dividing the category of Tax Compliance Initiatives into
two subcategories: Business and Individual and Tax Exempt Entities.
These subcategories better defined the need to administer tax
regulations and collect tax dollars from businesses and individuals,
and to oversee compliance issues for tax-exempt entities. Appendix E
identifies specific steps and actions being taken for the ten
management challenges below:
* Modernization of the Internal Revenue Service;
* Tax Compliance Initiatives;
* Security of the Internal Revenue Service;
* Providing Quality Taxpayer Service Operations;
* Complexity of the Tax Law;
* Using Performance and Financial Information for Program and Budget
Decisions;
* Erroneous and Improper Payments;
* Taxpayer Protection and Rights;
* Processing Returns and Implementing Tax Law Changes During the Tax
Filing Season;
* Human Capital.
Limitations of Financial Statements:
The principal financial statements have been prepared to report the
results of IRS operations, pursuant to the requirements of 31 U.S.C.
3515(b). The statements were prepared from the books and records of the
IRS in accordance with generally accepted accounting principles for
Federal entities and the format prescribed by OMB. The statements are
in addition to the financial reports used to monitor and control
budgetary resources, which are prepared from the same books and
records. The statements should be read with the realization that they
are a component of the U.S. Government, a sovereign entity.
Progress Made on Earned Income Tax Credit (EITC) Material Weakness:
The IRS continued progress on its action plan for the EITC material
weakness by providing a current estimate of error, an explanation of
the methodology, and an action plan to reduce error. The following
actions were also taken in FY 2007:
* Incorporated EITC into the National Research Program study for Tax
Year 2006. Results, expected in 2009, will enable the IRS to provide
updated estimates of error for the Improper Payment Information Act
based on recent compliance data;
* Began development of a holistic, data-driven, five-year strategy
designed to use enforcement and outreach treatments involving taxpayers,
preparers, and third parties to reduce EITC errors and protect revenue;
* Conducted a nationwide EITC Awareness Day for EITC eligible
taxpayers;
* Delivered key compliance activities including 500,000 audits, over
390,000 misreported income cases and 500,000 math error notices,
protecting revenue of $2.6 billion;
* Tested alternative treatments, such as soft notices, as compared to
more costly standard compliance treatments, i.e., examinations;
* Completed return preparer compliance tests designed to identify and
deter preparers of large numbers of erroneous EITC claims;
* Completed reports on the second and third year of the EITC
certification tests and in the process of completing a cumulative
report,
which will be used to make informed decisions about implementation of
certification as a compliance treatment.
Overview of Revenue and Administrative Accounts:
The IRS FY 2007 financial statements received an unqualified audit
opinion for the eighth consecutive year.
The Balance Sheet reflects total assets of $31 billion of which $26
billion (83%) are Federal Taxes Receivable, which represents amounts
expected to be collected from past due accounts. The $5 billion
increase in total assets is primarily attributable to the increase in
Federal taxes receivable. The majority of IRS’s liabilities consist of
amounts due to Treasury related to Federal taxes receivable.
The Statement of Custodial Activity shows that IRS programs collected
$2.69 trillion in federal tax receipts.
Financing Sources:
The IRS receives the majority of its funding through annual and
multiyear appropriations, which are available for use within certain
specified statutory limits. Besides appropriations, the IRS used other
financing sources. These included net transfers from other federal
agencies and revenue from user fees for direct services provided to
customers (for example, installment agreement fees, photocopy fees, and
letter rulings and determinations fees).
Financial Highlights:
Revenue and Refund Trend Information:
FY 2007 revenue receipts collected by IRS, $2.69 trillion, increased by
approximately 7% from FY 2006. Federal tax revenues are collected
through six major classifications: individual income FICA/SECA,
corporate income, excise taxes, estate and gift taxes, railroad
retirement, and federal unemployment taxes.
FY 2007 tax refund activity, $292 billion, increased by approximately
5% from FY 2006. Federal tax refunds include payments for tax,
interest, and Earned Income Tax Credit and Child Care Tax Credit in
excess of the tax liability. In FY 2007, the IRS issued payments of $64
million for Advanced Earned Income Tax Credit.
Excise Tax Trust Fund:
The Quarterly Federal Excise Tax Return, Form 720, reports liability
for excise taxes. Taxpayers make periodic deposits in advance of filing
the return. These deposits are classified as Federal Excise Tax. After
the IRS receives and processes the returns, the IRS certifies amounts
for several Trust Funds. Amounts reported on the Statement of Custodial
Activity are for fiscal year collections (October 1 through September
30). Because Form 720 reporting requirements are completed after
receipt of most of the deposits, the certification amounts will not
match the amounts collected in the fiscal year. The table below shows
revised receipts certified to the Airport and Airway Trust Fund, Black
Lung Disability Trust Fund and the Highway Trust Fund for the eight
liability quarters from December 2004 through September 2006. The
Treasury Department’s Financial Management Service and the Bureau of
Public Debt prepare the warrants and allocations to the various Trust
Funds.
Table:
Airport & Airway Trust Fund:
Liability Quarter Ended, December 2004 – September 2005:
$10,379,502,000;
Liability Quarter Ended, December 2005 – September 2006:
$10,183,465,000.
Black Lung Disability Trust Fund:
Liability Quarter Ended, December 2004 – September 2005: 612,445,000;
Liability Quarter Ended, December 2005 – September 2006: 607,881,000.
Highway Trust Fund:
Liability Quarter Ended, December 2004 – September 2005:
39,537,447,000;
Liability Quarter Ended, December 2005 – September 2006:
41,266,551,000.
Total:
Liability Quarter Ended, December 2004 – September 2005:
$50,529,394,000;
Liability Quarter Ended, December 2005 – September 2006:
$52,057,897,000.
Analysis of Unpaid Assessments – Most Unpaid Assessments Are Not
Receivables and Are Largely Uncollectible:
The unpaid assessment balance includes amounts owed by taxpayers who
file returns without sufficient payment as well as amounts assessed
through the IRS enforcement programs. As reflected in the supplemental
information to the IRS FY 2007 Financial Statements, the unpaid
assessment balance was about $263 billion as of September 30, 2007.
Under federal accounting standards, unpaid assessments require taxpayer
or court agreement to be considered federal taxes receivable.
Assessments not agreed to by taxpayers or the courts are considered
compliance assessments and are not considered federal taxes receivable.
Assessments considered to have no future collection potential are
called writeoffs. The following provides detail on unpaid assessments:
* Taxes receivable represent $98 billion (37%) of unpaid assessments
and increased $7 billion (8%) from 91 billion as of September 30, 2006.
About $72 billion (73%) of this balance is estimated to be
uncollectible due primarily to the taxpayer’s economic situation.
Except for bankruptcy situations, the IRS may continue collection
actions for 10 years after the assessment. About $26 billion (27%) of
taxes receivable is estimated to be collectible.
* Compliance assessments of $65 billion represent amounts that have not
been agreed to by either the taxpayer or a court. These assessments
result primarily from various IRS enforcement programs promoting
voluntary compliance.
* Write-off amounts of $100 billion include amounts owed by defunct
corporations with no assets and failed financial institutions. The
remaining amounts are owed by taxpayers with extreme economic and/or
financial hardships, deceased taxpayers, and taxpayers who are
insolvent due to bankruptcy.
* About $151 billion (58%) of the unpaid assessment balance as of
September 30, 2007, consists of interest and penalties and is largely
uncollectible.
Custodial Detail Data Base (CDDB):
CDDB was implemented by the IRS in FY 2006 to comply with the Federal
Financial Management Improvement Act and to resolve a material weakness
in financial systems relating to accounting for duplicate Trust Fund
Recovery Penalty assessments and the lack of a subsidiary ledger.
CDDB is an enhancement to the Financial Management Information System,
an operational system supplying reports and data used for the audit of
the Custodial Financial Statements of the IRS and provides data to
support the annual financial audit. CDDB is comprised of four primary
releases.
For FY 2007, CDDB accomplishments and implementation progress included:
* Completed the interface between CDDB and the Interim Revenue
Accounting Control System (IRACS) in April 2007 to post to the IRACS
data base unpaid assessments segregated by each of the financial
classifications used in the financial statements, the duplicate and non-
duplicate amounts related to taxpayer accounts associated with unpaid
payroll taxes, and their related accrued penalty and interest.
* Completed CDDB Release 2B Systems Acceptance Testing (SAT) to post
the revenue transactions to a data base. Loading the pre-posted
payments from Electronic Federal Tax Payment System at the transaction
level will begin in November 2007.
* Conducting SAT for posting a Trace ID Number to revenue transactions
in the remaining payment systems for Release 3 by December 2007, and
going into production in January 2008.
The Integrated Financial System (IFS):
Since IFS implementation in FY 2005, the IRS has expanded its
capabilities. For example, enhancements and interfaces were implemented
for several programs, including Homeland Security Presidential
Directive #12, Federal Highway Administration, and Income Verification
Express Service user fees. Also, customized budget execution and cost
reports produced from the IFS business warehouse were developed. New
training for IFS users was delivered providing techniques for fully
using the extensive reporting capabilities of IFS.
Appendix A: Organization Chart:
Department Of The Treasury, Internal Revenue Service:
[See PDF for image]
Commissioner; Chief of Staff:
* Appeals;
* Chief Counsel;
* National Taxpayer Advocate.
Commissioner; Chief of Staff:
* EEO and Diversity;
* Research, Analysis and Statistics;
* Communications and Liaison.
Commissioner; Chief of Staff:
* Deputy Commissioner, Services and Enforcement;
- Office of Professional Responsibility;
- Whistleblower Office.
Commissioner; Chief of Staff:
* Deputy Commissioner, Services and Enforcement;
- Small Business/Self Employed;
- Large and Mid-Sized Business;
- Criminal Investigation;
- Tax Exempt and Government Entities;
- Wage and Investment.
Commissioner; Chief of Staff:
- Deputy Commissioner, Operations Support;
- Chief Information Officer;
- Agency-Wide Shared Services;
- Human Capital Officer;
- Chief Financial Officer;
- Privacy, Information Protection and Data Security Office.
[End of appendix]
Appendix B: Performance Measurement Data:
Measure: Customer Service Representative (CSR) Level of Service;
2004: 87.3%;
2005: 82.6%;
2006: 82.%;
2007, Target: 82%;
2007: Actual: 82.1.
Measure: Customer Contacts Resolved per Staff Year;
2004: 8,015;
2005: 7,585;
2006: 7,414;
2007, Target: 7,702;
2007: Actual: 7,648.
Measure: Percent of Eligible Taxpayers Who File for EITC (CY):
2004: 80.0%;
2005: 80.0%;
2006: *;
2007, Target: 75-85%;
2007: Actual: *.
Measure: Customer Accuracy – Tax Law Phones;
2004: 80.0%;
2005: 89.0%;
2006: 90.9%;
2007, Target: 91.0%;
2007: Actual: 91.2%.
Measure: Customer Accuracy – Customer Accounts (Phones):
2004: 89.3%;
2005: 91.5%;
2006: 93.2%;
2007, Target: 93.3%;
2007: Actual: 93.4.
Measure: Timeliness of Critical Filing Season Tax Products to the
Public:
2004: 76.0%;
2005: 91.4%;
2006: 83.0%;
2007, Target: 85.2%;
2007: Actual: 83.5%.
Measure: Timeliness of Critical Other Tax Products to the Public:
2004: 76.0%;
2005: 80.0%;
2006: 61.2%;
2007, Target: 79.6%;
2007: Actual: 84.0%.
Measure: Percent Individual Returns Processed Electronically:
2004: 46.5%;
2005: 51.1%;
2006: 54.1%;
2007, Target: 57.0%;
2007: Actual: 57.1.
Measure: Cost per Taxpayer Served ($) (HCTC):
2004: N/A;
2005: N/A;
2006: $13.71;
2007, Target: $14.25;
2007: Actual: $14.93.
Measure: Sign-Up Time (days) – Customer Engagement (HCTC):
2004: N/A;
2005: 98.1;
2006: 98.7;
2007, Target: 97.0;
2007: Actual: 93.3.
Measure: Percent Business Returns Processed Electronically:
2004: 17.4%;
2005: 17.8%;
2006: 16.6%;
2007, Target: 19.5%;
2007: Actual: 191.1%.
Measure: Refund Timeliness – Individual (Paper):
2004: 98.3%;
2005: 99.2%;
2006: 99.3%;
2007, Target: 99.2%;
2007: Actual: 99.1%.
Measure: Taxpayer Self Assistance:
2004: 46.4%;
2005: 42.5%;
2006: 46.8%;
2007, Target: 48.6%;
2007: Actual: 49.5.
Measure: Examination Coverage – Individual:
2004: 0.8%;
2005: 0.9%;
2006: 1.0%;
2007, Target: 1.0%;
2007: Actual: 1.0%.
Measure: Field Examination Embedded Quality (EQ):
2004: N/A;
2005: N/A;
2006: 85.9%;
2007, Target: 87.0%;
2007: Actual: 85.9%.
Measure: Office Examination Embedded Quality (EQ):
2004: N/A;
2005: N/A;
2006: 88.2%;
2007, Target: 89.0%
2007: Actual: 89.4.
Measure: Examination Quality – Industry:
2004: 74.0%;
2005: 77.0%;
2006: 85.0%;
2007, Target: 88.0%;
2007: Actual: 87%.
Measure: Examination Quality – Coordinated Industry:
2004: 87.0%;
2005: 89.0%;
2006: 96.0%;
2007, Target: 97.0%;
2007: Actual: 96.0%.
Measure: Examination Coverage – Business (Corps. >$10M):
2004: 7.5%;
2005: 7.8%;
2006: 7.3%;
2007, Target: 8.2%;
2007: Actual: 7.2%.
Measure: Examination Efficiency – Individual (1040):
2004: N/A;
2005: 121;
2006: 128;
2007, Target: 136;
2007: Actual: 137.
Measure: Automated Underreporter (AUR) Efficiency:
2004: 1,514;
2005: 1,701;
2006: 1,832;
2007, Target: 1,932;
2007: Actual: 1,956.
Measure: Automated Underreporter (AUR) Coverage:
2004: 1.9%;
2005: 2.2%;
2006: 2.4%;
2007, Target: 2.5%;
2007: Actual: 2.5%.
Measure: Collection Coverage – Units:
2004: N/A;
2005: 53.0%;
2006: 54.0%;
2007, Target: 54.0%;
2007: Actual: 54.0%.
Measure: Collection Efficiency – Units:
2004: N/A;
2005: 1,514;
2006: 1,677;
2007, Target: 1,723;
2007: Actual: 1,828.
Measure: Field Collection Embedded Quality (EQ):
2004: N/A;
2005: N/A;
2006: 84.2%;
2007, Target: 86.0%;
2007: Actual: 84.0%.
Measure: Automated Collection System (ACS) Accuracy:
2004: 87.8%;
2005: 88.5%;
2006: 91.0%;
2007, Target: 91.0%;
2007: Actual: 92.9%.
Measure: Criminal Investigations Completed: 4,387 4,104 4,157 4,000
4,269
2004: 4,387;
2005: 4,104;
2006: 4,157;
2007, Target: 4,000;
2007: Actual: 4,269.
Measure: Number of Convictions:
2004: 2,008;
2005: 2,151;
2006: 2,019;
2007, Target: 2,069;
2007: Actual: 2,155.
Measure: Conviction Rate:
2004: 91.2%;
2005: 91.2;
2006: 91.5%;
2007, Target: 92.0%;
2007: Actual: 90.2%.
Measure: Conviction Efficiency Rate ($):
2004: 362,849;
2005: 295,316;
2006: 328,750;
2007, Target: 314,008;
2007: Actual: 301,788.
Measure: TE/GE Determination Case Closures:
2004: 143,877;
2005: 126,481;
2006: 108,462;
2007, Target: 118,200;
2007: Actual: 109,408.
Measure: BSM Project Cost Variance by Release/Subrelease:
2004: N/A;
2005: N/A;
2006: **;
2007, Target: 10.0%;
2007: Actual: **.
Measure: BSM Project Schedule Variance by Release/Subrelease:
2004: N/A;
2005: N/A;
2006: **;
2007, Target: 10.0%;
2007: Actual: **.
* The methodology for estimating the eligibility rate is being revised.
** Cost and Schedule variance is based on +/- 10% and is reported on
several project releases/subreleases.
[End of appendix]
Appendix C: Explanation of Shortfalls:
Customer Contacts Resolved per Staff Year: The Customer Contacts
Resolved per Staff Year target was set using preliminary FTE levels.
For FY 2007, the actual was 7,648, within 1% of the target of 7,702.
The IRS completed almost 4 million additional web services than
projected. During the latter part of the fiscal year, an emphasis was
placed on reducing inventory levels in the Accounts Management paper
programs, resulting in more FTE spent than were used in calculating the
target. Completing a web service is defined as providing a service
requested by a taxpayer or tax practitioner through self-assist
internet-based applications such as Internet Refund Fact of Filing
("Where's My Refund"), Transcript Delivery System, Preparer Tax
Identification Number, Internet-EIN, Prior Year Earned Income Option,
and Disclosure Authorizations.
Timeliness of Critical Filing Season Tax Products to the Public: For FY
2007, the Timeliness of Critical Filing Season Tax Products to the
Public was 83.5%, 1.7 percentage points below the FY 2007 target of
85.2% and 0.6% above the prior year’s performance of 83.0. The late
passage of Extender Legislation affecting state and local sales taxes
and education expenses was the primary cause for the IRS not meeting
this target. More than 1,000 tax product revisions affecting 137 of the
164 filing season products used by taxpayers were changed with no
impact to the start of the filing season. A total of 27 tax products
were delayed. Eleven tax products were directly impacted by the
Extender legislation and the remaining sixteen were indirectly impacted
by the Extender legislation as a result of workload modifications to
accommodate priority forms and publications. These products were
originally scheduled for processing between October and December 2006.
Cost Per Taxpayer Served ($): For FY 2007, the Cost Per Taxpayer Served
was $14.93, sixty-eight cents above the FY 2007 target of $14.25. The
shortfall was a result of having to absorb a one-time expense to
purchase Health Care Tax Credit Program Kits for taxpayers at a cost of
$300,000 to replace outdated supplies. The $300,000 cost was not
factored in when the target was set.
Percent of Business Returns Processed Electronically: For FY 2007,
19.1% of the business returns processed were filed electronically. This
is 2% below the plan of 19.5% and 15% above the prior year's
performance of 16.6%. For the fiscal year, business returns
processed are running more than 500,000 above total projections. Of
this overall increase over total projections, those from paper
submissions are almost 800,000 above projections, while those from
electronic submissions are almost 475,000 below projections. The
majority of the electronic submission under run continues to be
employment returns (primarily Forms 941, Employer's Quarterly Federal
Tax Return) and corporation returns (primarily Forms 1120, U.S.
Corporation Income Tax Return). The combination of e-File being under
schedule and the total business returns (paper and e-File combined)
being over schedule exacerbates the percentage of business returns e-
Filed.
Refund Timeliness – Individual (Paper): The IRS was within 1% of
target. For FY 2007, Refund Timeliness was 99.1%, 0.1 percentage point
below the FY 2007 target of 99.2%. Delays associated with taxpayer
identification number processing, including: increases in the number of
Individual Taxpayer Identification Number (ITIN) applications;
verification of required documentation (which is often submitted in a
foreign language); and ITIN System stability issues that caused work
stoppages during the peak processing season were the sources for delay.
Assignment of an ITIN must be completed before the associated tax return
can be processed and any refund claim released for processing.
Field Examination Embedded Quality: For FY 2007, Field Examination
Embedded Quality was 85.9%, 1.1 percentage points (a statistically
insignificant amount) short of the FY 2007 target of 87%. The FY 2007
target assumed a 10% improvement factor in the previously weakest
quality attributes. Although the 10% increase did not occur, there were
significant improvements in several other attributes that brought IRS
close to the target. Actions taken to improve the quality score
included studying the consistency between front-line manager Embedded
Quality Review System and the National Quality Review System processes
that produced the measurements. In addition, an Exam Process Challenge
Team was established to improve the audit process, with focus on the
quality attributes in most need of enhancement.
Examination Quality – Industry: The Exam Quality - Industry score of
87% was one percentage point (a statistically insignificant amount)
below the FY 2007 target of 88% because of scores slightly below
expectations in three of the four quality measurement technical
standards as well as in the administrative procedures standard. The
three technical standards were: Planning the Examination,
Inspection/Fact Finding, and Workpapers & Reports. The Quality
Assurance Staff continued to focus on the importance of meeting the
Technical Standards through direct feedback to field teams, partnering
with the industries in Quality Improvement Efforts, Quality Quotes,
Quarterly Reports and outreach to field teams. In addition, while the
field completed the Administrative Procedures Checksheet at a higher
percentage than in prior fiscal years, there were still some instances
where all administrative procedures were not properly documented. The
Quality Assurance Staff continued to stress the importance of properly
completed Administrative Procedures Checksheets and ensured all
administrative and statutory requirements were properly executed and
documented.
Examination Quality – Coordinated Industry: The Exam Quality –
Coordinated Industry score was 96%, one percentage point (a
statistically insignificant amount) below the FY 2007 target of 97%.
The IRS did not meet its target due to several factors related to the
examination planning process, specifically identification of material
issues and mandatory referrals to specialists. Another contributing
factor was missing or unsigned Administrative Procedures Documents. The
IRS continues to focus on the importance of meeting the Auditing
Standards through direct feedback to field teams, partnering with the
industries in Quality Improvement Efforts, Quality Quotes, Quarterly
Reports and outreaches to IRS field teams.
Examination Coverage – Business: The Exam Coverage – Business score was
7.2%, one percentage point below the FY 2007 target of 8.2%. Key
factors contributing to the shortfall, included the implementation of
currency and cycle time initiative, which resulted in substantially
more current coordinated industry cases (CIC) that contain fewer cycles
and fewer returns; increased time spent on the Compliance Assurance
Program (cases addressing issues in a pre-filing environment), which
resulted in less numbers of closed returns from a comparable CIC
examination; and the rollout of the Issue Management System, (a case
management tool used during the examination process) which consumed
more agent time than planned.
Field Collection Embedded Quality: The Field Collection Embedded
Quality score was 84%, two percentage points below the FY 2007 target
of 86%. Although the Field Collection quality score improved over last
fiscal year, the FY 2007 target was established assuming Embedded
Quality would be fully implemented at the start of FY 2007. However,
implementation was delayed until March 2007, and the first quarterly
report was not available until June 2007. These reports provide
managers with data that allows them to focus improvements on specific
attributes. Quality remains a core goal of the Collection organization
and is emphasized in both the Collection Program letter and the
business plans for FY 2008. The IRS took the following actions to
improve quality results: 1) conducted quarterly reviews in each area to
ensure consistent application of the quality attributes and evaluated
trends in order to identify areas that require additional rating
guidance and clarity. The IRS will continue these reviews in FY 2008;
2) developed quality improvement action plans for each Collection area,
which focused on specific elements that dropped 5% or more in each
attribute.
Conviction Rate: Criminal Investigation (CI) has historically achieved
one of the highest conviction rates of any Federal law enforcement
agency. The FY 2007 conviction rate was 90.2%, 1.8 percentage points
below the 92% target rate. The drop in FY 2007 appears to be largely
attributable to an increase in dismissals, many involving complex legal
issues and multiple defendants. Some of these dismissals were appealed
by the government. It is possible to materially reduce the number of
dismissals by selecting less sophisticated cases, however, over the
past five years, CI demonstrated that investigating sophisticated high
dollar, high impact legal source income cases fosters effective
deterrence, although these cases entail risk.
Tax Exempt and Government Entities (TEGE) Determination Case Closures:
The IRS fell short of the combined target of 118,200 determination case
closures by 7%. This was caused by several factors. First, workload in
this area is driven by external demand; for various reasons, the IRS
received 12,000 fewer applications than expected. Responding to customer
requests, the IRS extended certain filing deadlines. In addition,
following a major revision to the user fee schedule for determination,
a large number of submissions were returned to applicants due to
incorrect user fees. Finally, legislative changes in the Pension
Protection Act shifted workload priorities toward a number of time-
consuming cases, resulting in fewer closures overall.
[End of appendix]
Appendix D: Performance Measurement Descriptions:
Customer Service Representative (CSR) Level of Service:
The number of toll free callers that either speak to a Customer Service
Representative or receive informational messages divided by the total
number of attempted calls.
Customer Contacts Resolved per Staff Year:
The number of Customer Contacts resolved in relation to staff years
expended.
Percent of Eligible Taxpayers Who File for EITC:
The number of taxpayers who claim the Earned Income Tax Credit (EITC)
compared to the number of taxpayers who appear to be eligible for the
EITC.
Customer Accuracy – Tax Law Phones:
The percentage of correct answers given by a live assistor on Tollfree
tax law inquiries.
Customer Accuracy – Customer Accounts (Phones):
The percentage of correct answers given by a live assistor on Tollfree
account inquiries.
Timeliness of Critical Filing Season Tax Products to the Public:
The percentage of critical filing season tax products (tax forms,
schedules, instructions, publications, tax packages, and certain
notices required by a large number of filers to prepare a complete and
accurate tax return) available to the public in a timely fashion.
Timeliness of Critical Other Tax Products to the Public:
Percentage of critical other tax products, paper and electronic,
available to the public in a timely fashion.
Percent Individual Returns Processed Electronically:
The percentage of electronically filed individual tax returns divided
by the total individual returns filed.
Cost per Taxpayer Served ($) (HCTC):
The costs associated with serving the taxpayers including program kit
correspondence, registration and program participation.
Sign-Up Time (days) – Customer Engagement (HCTC):
The length of time between the first Program Kit mailing and first
payment received.
Percent Business Returns Processed Electronically:
The percentage of electronically filed business tax returns divided
by the total business returns filed.
Taxpayer Self Assistance Rate:
The percentage of taxpayer assistance requests resolved using self-
assisted automated services.
Refund Timeliness – Individual (Paper):
The percentage of refunds resulting from processing Individual Master
File paper returns issued within 40 days or less.
Examination Coverage – Individual (1040):
The sum of all individual 1040 returns closed by Small Business/Self
Employed (SB/SE), Wage & Investment (W&I), and Large and Mid-Sized
Business (LMSB) (Field Exam and Correspondence Exam programs ) divided
by the total individual return filings for the prior calendar year.
Field Examination Embedded Quality (EQ):
The score awarded to a reviewed field examination case by a Quality
Reviewer using the National Quality Review System (NQRS) quality
attributes.
Office Examination Embedded Quality (EQ):
The score awarded to a reviewed office examination case by a Quality
Reviewer using the NQRS quality attributes.
Examination Coverage – Business (Corps. >$10M):
The number of LMSB “customer base” returns (C and S Corporations with
assets over $10 million and all partnerships) examined and closed by
LMSB during the current fiscal year divided by the number of filings
for the preceding calendar year.
Examination Efficiency – Individual (1040):
The sum of all individual 1040 returns closed by SB/SE, W&I, and LMSB
(Field Exam and Correspondence Exam programs) divided by the total Full-
Time Equivalent (FTE) expended in relation to those individual returns.
Automated Underreporter (AUR) Efficiency:
The total number of W&I and SB/SE contact closures (a closure resulting
from a case where we made contact) divided by the total FTE, including
overtime.
Automated Underreporter (AUR) Coverage:
A percentage representing the total number of W&I and SB/SE contact
closures (a closure resulting from a case where SBSE and W&I made
contact) divided by the total return filings for the prior year.
Examination Quality – Industry:
Average of the scores of Industry Cases reviewed. Case scores are based
on the percentage of elements passed within each auditing standard.
Examination Quality – Coordinated Industry:
Average of the scores of Coordinated Industry Cases reviewed. Case
scores are based on the percentage of elements passed within each
auditing standard.
Collection Coverage – Units:
The volume of collection work disposed compared to the volume of
collection work available.
Collection Efficiency – Units:
The sum of all modules disposed by Automated Collection System (ACS)
(SB/SE & W&I) and by SB/SE Field Collection divided by the total
collection FTE.
Field Collection Embedded Quality (EQ):
The score awarded to a reviewed collection cases by a Quality Reviewer
using the NQRS quality attributes.
Automated Collection System (ACS) Accuracy:
The percent of taxpayers who receive the correct answer to their ACS
question.
Criminal Investigations Completed:
The total number of subject criminal investigations completed during
the fiscal year, including those that resulted in prosecution
recommendations to the Department of Justice as well as those
discontinued due to a lack of prosecution potential.
Number of Convictions:
The number of criminal convictions.
Conviction Rate:
The percent of adjudicated criminal cases that result in convictions.
Conviction Efficiency Rate ($):
The cost of Criminal Investigation’s (CI's) program divided by the
number of convictions. The number of convictions is the total number of
cases with the following statuses: guilty plea, nolo contendere, judge
guilty or jury guilty. The CI financial plan includes direct and
reimbursable costs, including employees’ salaries, benefits, and
investigative expenses, as well as facility costs (office space,
heating, cleaning, computers, security, etc.), and other overhead
costs.
TE/GE Determination Case Closures:
The number of cases closed in the Employee Plans or Exempt
Organizations Determination programs, regardless of type of case
or type of closing.
BSM Project Cost Variance by Release/Subrelease:
Percent variance by release/sub-release of a Business Systems
Modernization (BSM) funded project's initial, approved cost estimate
versus current, approved cost estimate. Cost variances less than or
equal to +/- 10% are categorized as being within acceptable tolerance
thresholds. Cost variances greater than +/- 10% of the variance are
categorized as being outside of acceptable thresholds.
BSM Project Schedule Variance by Release/Subrelease:
Percent variance by release/sub-release of a BSM funded project's
initial, approved schedule estimate versus current, approved schedule
estimate. Schedule variances less than or equal to +/- 10% will be
categorized as being within acceptable tolerance thresholds. If
schedule variances are greater than +/- 10%, the variance will be
categorized as being outside of acceptable thresholds.
[End of appendix]
Appendix E: Major Management Challenges and High-Risk Areas With Future
Challenges:
Over the last several years GAO, TIGTA, and the OIG for Treasury have
identified several Management Challenges and High-Risk Areas facing the
IRS. The IRS has identified specific steps and actions to address these
issues through its existing program activities. Measures of these
program activities serve to show progress in addressing the management
challenges and high-risk areas. The following summarizes each
Management Challenge and High-Risk issue, FY 2007 accomplishments,
actions identified for completion in FY 2008 and beyond, and future
challenges.
Challenge/Issue: Modernization of the Internal Revenue Service
(Computerized Systems and Business Structure) and IRS Business Systems:
Bring the IRS’s business systems and financial systems to a level that
provides management current and reliable information to support
informed decision making. GAO, in its FY 2005 High Risk series,
has consolidated IRS Business Systems Modernization and IRS Financial
Management into one Business Systems Modernization high-risk area.
Actions Taken in FY 2007 and Actions Planned or Underway:
Actions Taken:
* Deployed Customer Account Data Engine (CADE) Release 2 enabling CADE
to process over 11 million returns and issue refunds of $11.6 billion.
* Added new capabilities to the Modernized e-File (MeF) system that
enabled the receipt of electronically filed Partnership Returns (Forms
1065 & 1065B), meeting the mandate for taxpayers with 100 or more
partners to file electronically. MeF received over two million
corporate, non-profit, and partnership forms for processing.
* Deployed the first two releases of the Accounts Management Services
(AMS) system, designed to deliver improved customer support and
functionality by leveraging existing IRS applications.
* Continued development of a comprehensive strategy for the future
beyond 2007, known as the Modernization Vision & Strategy (MV&S). The
MV&S includes an Enterprise Transition Strategy that addresses
priorities for modernizing front-line tax administration functions and
guides IT investment decision making.
* Implemented a new governance structure to account for all IT
investment projects, regardless of dollar value.
Actions Planned or Underway for FY 2008 and Beyond:
* Continue focus on modernization of the tax administration systems to
provide additional benefits to taxpayers and maintain continuity of the
program while mitigating risk through improved governance.
* Expand modernized electronic filing capabilities to US income tax
returns for foreign corporations to accommodate the 2008 electronic
filing requirement for exempt organizations with less than $25,000 in
gross receipts.
* Continued deployment of improved management through the High Priority
Initiative process.
Challenge/Issue: Tax Compliance Initiatives:
Administer programs to deal with tax gap issues, especially those
resulting from corporate and high income individual taxpayers, as well
as domestic and off-shore tax and financial criminal activity. Address
the evolving challenge of unpaid taxes and continuing Earned Income Tax
Credit (EITC) non-compliance.
Individuals and Businesses, Actions Taken:
* Collected $59.2 billion in enforcement revenue, a 75% increase since
2001.
* Released “Reducing the Federal Tax Gap: A Report on Improving
Voluntary Compliance,” which, combined with legislative changes, will
guide organizational efforts to reduce the tax gap.
* Initiated a compliance study for Subchapter S corporations and a Tax
Year 2006 individual income reporting compliance study.
* Updated workload selection models for tax year 2006 using data from
prior compliance studies, enabling the IRS to better leverage limited
enforcement resources and reduce the burden on compliant taxpayers.
* Issued new regulations dealing with transactions of interest
(transactions that have potential for abuse but lack sufficient
information to be designated specifically as tax avoidance
transactions) and clarified rules relating to disclosure of reportable
transactions allowing IRS more flexibility in quickly addressing
potential tax shelter issues.
* Targeted preparers whose tax work indicated questionable return
preparation practices and assessed over $62 million in penalties.
Admissions of these regrettable behaviors received significant
publicity.
Individuals and Businesses, Actions Planned or Underway for FY 2008 and
Beyond:
* IRS’s FY 2008 budget request includes funding to support multiple
reporting compliance studies for additional taxpayer segments such as
corporate income taxpayers, partnerships, S corporations, and employment
taxpayers.
* Implement provisions contained in the report on the federal tax gap.
Tax Exempt and Government Entities, Actions Taken:
* Increased enforcement presence through a 5% increase in examinations
and 12% in overall compliance contacts, including conducting reviews of
executive compensation practices among tax-exempt organizations.
* Developed web-based tools such as [hyperlink,
http://www.stayexempt.org], a popular website that helps tax exempt
entities understand their federal tax requirements.
* Developed workshops to assist remote tribal villages in understanding
federal and state employment tax and other reporting requirements.
Tax Exempt and Government Entities, Actions Planned or Underway for FY
2008 and Beyond:
* Continue to focus efforts on tax shelter schemes and abusive
transactions.
* Continue compliance initiatives to address tribal gaming and banking
issues.
* Develop risk-based models to improve examination case selection.
Challenge/Issue: Security of the Internal Revenue Service:
Strengthening the security infrastructure and the applications that
guard sensitive data.
Actions Taken:
* Established new offices including the Office of Privacy, Information
Protection, and Data Security to provide direction and oversight
regarding the security and protection of sensitive information.
* Established an Associate Chief Information Officer position to manage
the IRS-wide Information Technology Security Program.
* Developed an integrated Information Technology Security Schedule and
Plan, and a comprehensive IRS security strategy, which defined areas for
improvement in the security posture of the IRS.
* Encrypted all laptop data and tapes used in electronic data exchange.
* Implemented an enterprise anti-virus Internet gateway solution to
detect and quarantine malicious content from invading systems.
* Updated IRS mandatory employee training to reflect recent policy
guidance and reinforced employee responsibilities related to the
protection of sensitive information and the use of encryption tools.
Actions Planned or Underway for FY 2008 and Beyond:
* Upgrade core security infrastructure components, including firewalls
and network intrusion detections systems.
* Implement a security solution that facilitates the recovery and
preservation of evidence from remote systems involved in security
incidents.
* Assess the vulnerability of critical systems across all business
operations, including identification of new on-line computer fraud
schemes.
Challenge/Issue: Providing Quality Taxpayer Service Operations:
Providing top quality service to every taxpayer in every transaction is
an integral part of the IRS’s strategic and modernization plans.
Actions Taken:
* Completed the Taxpayer Assistance Blueprint (TAB), the most extensive
research effort on the needs, preferences, and behaviors of taxpayers
and partners who assist them in complying with the tax laws.
* Provided assistance to millions of taxpayers through toll-free call
centers, the IRS.gov website, the 401 Taxpayer Assistance Centers, and
at more than 11,922 Volunteer Income Tax Assistance and Tax Counseling
for the Elderly sites.
* Created key messages and publicized split refund capability and the
Telephone Excise Tax Refund (TETR) through a network of more than 300
partner coalitions and more than 11,000 sites.
* Provided free tax assistance to the elderly, disabled and limited
English proficient individuals, filing approximately 2.63 million
returns through its Volunteer Income Tax and Tax Counseling for the
Elderly sites (a 14% increase over FY 2006).
* Increased the number of partnerships with community-based
organizations assisting taxpayers with financial literacy, return
preparation, and tax return filing. These efforts resulted in an
increase in outreach efforts by 15% and return preparation by 18% over
FY 2006.
* Held a National EITC Day, a single-day nationwide media campaign to
increase awareness of EITC among eligible taxpayers.
Actions Planned or Underway for FY 2008 and Beyond:
* Implement TAB service improvement initiatives through the IRS planning
and budget process.
* Deliver Spanish interactive tax applications, including the Spanish
version of “Where’s My Refund?” and hyperlinked applications.
* Continue efforts utilizing IRS partners to disseminate information,
simplify forms, and tax filing processes.
Challenge/Issue: Complexity of the Tax Law:
Simplifying the tax process within current laws while at the same time
modernize IRS systems and processes to reduce tax complexity for
individual and business taxpayers.
Actions Taken:
* Redesigned the Request for Innocent Spouse Relief, Form 8857, which is
expected to eliminate 30,000 follow-up letters annually, reducing
taxpayer burden.
* Designed a “1040 Central” page which contains new releases, fact
sheets, and tax tips to keep taxpayers informed of changes when they
happen.
* Tested a streamlined Form 1040 that moves lesser-used lines for
certain income, deductions, and credits from the Form 1040 to a new
Schedule O, reducing burden for approximately 95% of individual
taxpayers.
* Created an internet version of a popular tax compliance workshop for
small to mid-sized exempt organizations, including charities and
churches, which received positive media coverage and an enthusiastic
reaction from practitioners and stakeholders.
* Developed a three-point plan that expanded EITC outreach initiatives
and outlined effort to improve forms and various media for EITC filers.
Actions Planned or Underway for FY 2008 and Beyond:
* Contingent on funding, implement the streamlined Form 1040 with a new
Schedule O, in conjunction with Modernized e-File Form 1040 for cost
efficiency.
* Complete the Study of Universal Use of Advanced Payment of EITC.
* Continue to develop guidance in response to The Pension Protection
Act of 2006.
* Develop a simplified employee plan application process for small
employers.
* Finalize and present correction workshops to employers and plan
representatives unfamiliar with employee benefits practice.
* Address potential compliance issues for small businesses and
individuals with limited English proficiency through the translation of
chapters in Publication 17, “Your Federal Income Tax,” and Publication
334, “Tax Guide for Businesses.”
Challenge/Issue: Using Performance and Financial Information for
Program and Budget Decisions:
The absence of accurate and complete management information hinders the
IRS’s ability to produce timely, accurate and useful information needed
for day-to-day decisions.
Actions Taken:
* Expanded the capabilities of the Custodial Detail Database (CDDB) to
provide the IRS with the means to trace payments and refunds at the
point of receipt providing the data necessary to quickly trace missing
payments and missing refund information.
* Completed a second release for CDDB which provided weekly updates
for unpaid trust fund assessments, allowing for the tracing of multiple
and duplicate transactions.
* Improved the accuracy and reliability of IRS’s property and equipment
accounting records by making enhancements to accounting code
definitions used to select proper accounting codes for recording a
transaction, improving the coordination among units, and streamlining
the analysis of transactions most susceptible to misclassification.
* Issued a cost accounting policy to provide guidance to the business
units on allocating and reporting costs. Additional initiatives
supporting cost accounting included performing analysis of cost data
from the Integrated Financial System in support of business unit
decision making.
Actions Planned or Underway for FY 2008 and Beyond:
* Develop the redesign of the Interim Revenue Account Control System
to provide new functionality and move the existing system into general
ledger compliance.
* Complete the development and implementation of additional CDDB
releases that add other revenue receipt transactions (Federal Tax
Deposits, Lockbox remittances) and create a refund transactions
subsidiary ledger.
Challenge/Issue: Erroneous and Improper Payments:
Reduce improper payments that include base compliance activities and
redesign efforts.
Actions Taken:
* Met all of the Improper Payments Information Act of 2002 requirements
for EITC by providing a current estimate of error, an explanation of the
methodology, and an action plan to reduce error.
* Protected about $2.6 billion in revenue EITC enforcement efforts,
which included the examination of 500,000 returns claiming EITC, 390,000
document matching reviews, and 500,000 math error process corrections.
* Identified more than 169,000 potentially fraudulent returns claiming
over $1.3 billion in refunds, stopped over $1 billion in fraudulent
claims using the Electronic Fraud Detection System and referred more
than 131,000 returns for civil investigations.
* Completed the second phase of the return preparers’ compliance study
and, through due diligence visits, reduced erroneous refunds by
assessing 8,554 due diligence penalties against 219 of the preparers
visited.
* Developed and implemented a robust enterprise research strategy in
partnership with internal and external organizations to support the IRS
goals of reducing erroneous claims and increasing participation of EITC
eligible taxpayers.
Actions Planned or Underway for FY 2008 and Beyond:
* Identify opportunities to reduce the number of erroneous and improper
payments by analyzing the results from the first year of the multi-year
National Research Program study. The study is designed to provide an
annual update of the EITC error rate and will enable the IRS to more
quickly explore research-based, cost-effective approaches to improve
EITC participation and minimize errors.
* Continue to identify and investigate high-impact fraud and tax scheme
promoters.
* Actively explore research-based cost-effective approaches to improve
EITC participation and minimize errors.
* Complete development of a new Concept of Operations, a multi-year
vision that will drive development of expanded and new EITC Program
strategic initiatives, including a paid preparer strategy.
Challenge/Issue: Taxpayer Protection and Rights:
The IRS has made significant progress in complying with the Internal
Revenue Service Restructuring and Reform Act of 1998, and most
provisions pertaining to taxpayer protection and rights have been
implemented. Significant management attention is still required to
ensure that remaining issues have been addressed.
Actions Taken:
* Through quarterly managerial and annual independent reviews, IRS
continued to monitor compliance with the taxpayer rights provisions of
Section 1204 of the Internal Revenue Restructuring and Reform Act of
1998 which prohibits the use of Records of Tax Enforcement Results to
evaluate, impose or suggest production goals and quotas with respect
to such employees.
* Provided aggressive oversight of Private Collection Agencies to ensure
taxpayer rights were protected as accounts were migrated.
* Implemented additional controls to ensure taxpayers are properly
informed of potential action prior to generating a levy.
Actions Planned or Underway for FY 2008 and Beyond:
* Complete the Federal Tax Levy Payment Program (FLPP) research
project to determine the best approach for ensuring that levies
processed through the FLPP against Social Security and Railroad
Retirement Board benefits do not result in hardship for low-income
taxpayers.
* Continue efforts to protect taxpayer rights through established
reviews and safeguards.
* Complete the development of an updated Concept of Operations to
address paid preparer non-compliance and establish treatment
alternatives that align intensity of the efforts with the level of paid
preparer behaviors.
* Establish a new enterprise approach to examine questionable claims
and protect revenue prior to issuing refunds, focusing on identifying
and releasing legitimate claims quickly.
Challenge/Issue: Processing Returns and Implementing Tax Law Changes
During the Filing Season:
The filing season remains a critical IRS program that impacts every
American taxpayer. Many programs, activities and resources have to be
planned and managed effectively for the filing season to be successful.
Actions Taken:
* Delivered a successful filing season with more than 139.7 million
individual returns processed, and more than 105.5 million refunds
issued totaling $261 billion.
* Increased electronic filing to 57.1% for individuals and 19.1% for
business returns, increases of 5% and 15%, respectively, over FY
2006.
* Delivered an integrated approach to TETR enabling filing of over 94
million 2006 federal income tax returns which claimed more than $4.81
billion in credits or refunds.
* Implemented processing procedures to accommodate TETR and split
refunds, which impacted all of the 1040 series of returns by adding line
items. Developed new forms, publications, and employee training
materials, as well as the programming of 38 major filing systems.
* Implemented an extensive communication strategy for TETR which
included release of information in over 4,000 articles in magazines and
newspapers, 22 news releases, and 8 “Tax Tips” for an estimated media
reach of more than 88 million people along with delivery of the message
on IRS.gov viewed by more than 4.5 million people.
* Prevented more than $40 million in erroneous refunds through in-depth
analysis of TETR claims and split refund requests.
Actions Planned or Underway for FY 2008 and Beyond:
* Ensure filing season readiness through executive plan oversight.
* Continue to include TETR information in the individual income tax
packages for TY 2007, advising eligible taxpayers who did not claim the
TETR credit on their original TY 2006 returns to file amended returns.
Challenge/Issue: Human Capital:
The IRS’s ability to meet expectations outlined by the President’s
Management Agenda in personnel management area, such as recruiting,
training, and retaining employees.
Actions Taken:
* Continued to hire and train candidates to fill mission critical
occupations, meeting or exceeding the targets in four key enforcement
occupations.
* Achieved 99.1% of filing season hiring commitments and 100% in 6 out
of 10 campus locations.
* Developed a Human Capital Strategy which included the establishment
of a Center of Excellence Office, development of training and
recruitment strategy and hiring of a cadre of employees to support
project development efforts.
* Created and began utilizing a Succession Management Program for the
identification and recruitment of talented leaders.
* Delivered the $2.8 million multi-media advertising and marketing plan
that supported national recruitment events and partnerships with
national advocacy and support groups.
* Offered the newly authorized incentives to attract applicants who will
help IRS meet mission critical goals.
* Expanded external and rolling out internal recruitment modules (Career
Connector), addressing more than 100 occupations.
* Completed workforce planning and benchmarking study and developed a
business case for IRS workforce framework implementation.
Actions Planned or Underway for FY 2008 and Beyond:
* Complete strategic analysis of turnover rates, costs, and drivers.
* Development of a cost-index model to quantify turnover, with rollout
to all business units.
* Simplification of the application process and the use of hiring
incentives.
* Continue efforts to quickly replace key leaders lost to retirement by
expanding the Succession Management Program and expanding use of the
Leadership Succession Review tool to levels below the senior executive.
[End of appendix]
Financial Statements:
Principal Financial Statements:
The principal financial statements have been prepared to report the
financial position and results of operations of the Internal Revenue
Service (IRS), pursuant to the requirements of the Chief Financial
Officers Act of 1990 (P.L. 101-576), the Government Management Reform
Act of 1994 and the Office of Management and Budget’s (OMB) Circular
No. A-136, revised June 29, 2007, Financial Reporting Requirements. The
responsibility for the integrity of the financial information included
in these statements rests with the management of the IRS. The audit of
IRS’s principal financial statements was performed by the Government
Accountability Office (GAO). The auditors’ report accompanies the
principal statements.
IRS’s principal financial statements for fiscal years 2007 and 2006 are
as follows:
* The Balance Sheet describes the assets, liabilities and net position
components of IRS.
* The Statement of Net Cost presents the net cost of operations by
program. It includes the gross costs less any exchange revenue earned
from activities.
* The Statement of Changes in Net Position presents the change in IRS’s
net position resulting from the net cost of operations, budgetary
financing sources other than exchange revenues, and other financing
sources.
* The Statement of Budgetary Resources presents the budgetary
resources; the status of those resources; the change in obligated
balances during the year; and the outlays. Additional detail by major
budget accounts is available in the Required Supplementary
Information section.
* The Statement of Custodial Activities presents the sources and
disposition of nonexchange federal tax revenues collected and accrued
by the IRS.
Table:
Internal Revenue Service Balance Sheet As of September 30, 2007 and 2006
(In Millions):
Assets: Intragovernmental: Fund balance with Treasury (Note 2);
2007: $2,074;
2006: $2,066.
Assets: Intragovernmental: Due from Treasury (Note 6);
2007: 1,675;
2006: 1,695.
Assets: Intragovernmental: Other assets (Note 3);
2007: 187;
2006: 205.
Assets: Total Intragovernmental;
2007: 3,936;
2006: 2,966.
Assets: Cash and other monetary assets (Note 4, 6);
2007: 165;
2006: 52.
Assets: Federal taxes receivable, net (Notes 5, 6);
2007: 26,000;
2006: 21,000.
Assets: Property and equipment, net (Note 7);
2007: 1,194;
2006: 1,280.
Assets: Other assets (Note 3);
2007: 14;
2006: 15.
Total Assets:
2007: 31,309;
2006: 26,313.
Liabilities: Intragovernmental, Due to Treasury (Note 5);
2007: 26,000;
2006: 21,000.
Liabilities: Intragovernmental, Other liabilities (Note 8);
2007: 176;
2006: 178.
Liabilities: Total Intragovernmental;
2007: 26,176;
2006: 21,178.
Liabilities: Federal tax refunds payable;
2007: 1,675;
2006: 1,695.
Liabilities: Other liabilities (Notes 8, 9, 10);
2007: 1,692;
2006: 1,541.
Total Liabilities:
2007: 29,543;
2006: 24,414.
Net Position: Unexpended Appropriations;
2007: 1,482;
2006: 1,575.
Net Position: Cumulative Results of Operations;
2007: 284;
2006: 324.
Total Net Position:
2007: 1,766;
2006: 1,899.
Total Liabilities and Net Position:
2007: 31,309;
2006: 26,313.
The accompanying notes are an integral part of these statements.
[End of table]
Table:
Internal Revenue Service Statement of Net Cost For the Years Ended
September 30, 2007 and 2006 (In Millions):
Program: Taxpayer Assistance and Education, Gross cost;
2007: $479
2006: $407.
Program: Taxpayer Assistance and Education, Earned revenue:
2007: (3);
2006: (55).
Program: Taxpayer Assistance and Education, Net cost of program:
2007: 476;
2006: 352.
Program: Filing and Account Services, Gross cost:
2007: 3,640;
2006: 3,690.
Program: Filing and Account Services, Earned revenue:
2007: (43);
2006: (33).
Program: Filing and Account Services, Net cost of program:
2007: 3,5597;
2006: 3,657.
Program: Compliance, Gross cost:
2007: 7,702;
2006: 7,409.
Program: Compliance, Earned revenue:
2007: (231);
2006: (125).
Program: Compliance, Net cost of program:
2007: 7,471;
2006: 7,284.
Administration of Tax Credit Programs, Gross cost:
2007: 192;
2006: 192.
Administration of Tax Credit Programs, Earned revenue:
2007: [Empty];
2006: [Empty].
Administration of Tax Credit Programs, Net cost of program:
2007: 192;
2006: 192.
Net Cost of Operations (Note 11):
2007: 11,735;
2006: 11,485.
The accompanying notes are an integral part of these statements.
[End of table]
Internal Revenue Service Statement of Changes in Net Position For the
Years Ended September 30, 2007 and 2006 (in millions):
Beginning Balances:
2007: Cumulative Results of Operations: $324;
2007: Unexpended Appropriations: $1,575;
2006: Cumulative Results of Operations: $355;
2006: Unexpended Appropriations: $1,528.
Budgetary Financing Sources, Appropriations received:
2007: Cumulative Results of Operations: [Empty};
2007: Unexpended Appropriations: 10,596;
2006: Cumulative Results of Operations: [Empty];
2006: Unexpended Appropriations: 10,681.
Budgetary Financing Sources, Appropriations transferred in/out:
2007: Cumulative Results of Operations: [Empty];
2007: Unexpended Appropriations: 4;
2006: Cumulative Results of Operations: [Empty];
2006: Unexpended Appropriations: [Empty].
Budgetary Financing Sources, Other Adjustments:
2007: Cumulative Results of Operations: [Empty];
2007: Unexpended Appropriations: (73);
2006: Cumulative Results of Operations: [Empty];
2006: Unexpended Appropriations: (227).
Budgetary Financing Sources, Appropriations used:
2007: Cumulative Results of Operations: 10,621;
2007: Unexpended Appropriations: (10,621);
2006: Cumulative Results of Operations: 10,417;
2006: Unexpended Appropriations: (10,417).
Budgetary Financing Sources, Non-exchange revenue - Earmarked Funds
(Note 13):
2007: Cumulative Results of Operations: 11;
2007: Unexpended Appropriations: [Empty];
2006: Cumulative Results of Operations: [Empty];
2006: Unexpended Appropriations: [Empty].
Other Financing Sources, Imputed financing:
2007: Cumulative Results of Operations: 1,094;
2007: Unexpended Appropriations: [Empty];
2006: Cumulative Results of Operations: 1,060;
2006: Unexpended Appropriations: [Empty].
Other Financing Sources, Transfers in/out without reimbursement:
2007: Cumulative Results of Operations: 13;
2007: Unexpended Appropriations: [Empty];
2006: Cumulative Results of Operations: 18;
2006: Unexpended Appropriations: [Empty].
Other Financing Sources, Transfers to General Fund:
2007: Cumulative Results of Operations: (44);
2007: Unexpended Appropriations: [Empty];
2006: Cumulative Results of Operations: (41);
2006: Unexpended Appropriations: [Empty].
Total Financing Sources:
2007: Cumulative Results of Operations: 11,695;
2007: Unexpended Appropriations: (93);
2006: Cumulative Results of Operations: 11,454;
2006: Unexpended Appropriations: 37.
Net Cost of Operations:
2007: Cumulative Results of Operations: (11,735);
2007: Unexpended Appropriations: [Empty];
2006: Cumulative Results of Operations: (11,485);
2006: Unexpended Appropriations: [Empty].
Net Change:
2007: Cumulative Results of Operations: (40);
2007: Unexpended Appropriations: (93);
2006: Cumulative Results of Operations: (31);
2006: Unexpended Appropriations: 37.
Ending Balances:
2007: Cumulative Results of Operations: $284;
2007: Unexpended Appropriations: $1,482;
2006: Cumulative Results of Operations: $324;
2006: Unexpended Appropriations: $1,575.
The accompanying notes are an integral part of these statements.
[End of table]
Internal Revenue Service Statement of Budgetary Resources For the Years
Ended September 30, 2007 and 2006 (In Millions):
Budgetary Resources, Unobligated balance, beginning of period:
2007: $552;
2006: $488.
Budgetary Resources, Recoveries of prior year unpaid obligations:
2007: 183;
2006: 127.
Budgetary Resources, Budget authority, Appropriations:
2007: 10,776;
2006: 10,782.
Budgetary Resources, Budget authority, Spending authority from
offsetting collections:
2007: 119;
2006: 104.
Budgetary Resources, Nonexpenditure transfers, net:
2007: 4;
2006: [Empty].
Budgetary Resources, Permanently not available:
2007: (73);
2006: (227).
Total Budgetary Resources:
2007: 11,561;
2006: 11,274.
Status of Budgetary Resources, Obligations incurred (Note 12):
2007: 10,897;
2006: 10,722.
Status of Budgetary Resources, Unobligated balance – available (Note
2):
2007: 171;
2006: 192.
Status of Budgetary Resources, Unobligated balance – not available
(Note 2):
2007: 493;
2006: 360.
Total Status of Budgetary Resources:
2007: 11,561;
2006: 11,274.
Change in Obligated Balance, Obligated balance, net, beginning of
period:
2007: 1,522;
2006: 1,511.
Change in Obligated Balance, Obligations incurred (Note 12):
2007: 10,897;
2006: 10,722.
Change in Obligated Balance, Gross Outlays:
2007: (10,800);
2006: (10,586);
Change in Obligated Balance, Recoveries of prior year unpaid
obligations, actual:
2007: (183);
2006: (127(.
Change in Obligated Balance, Change in uncollected customer payments
from Federal sources:
2007: (9);
2006: 2.
Obligated balance, net, end of period (Note 12):
2007: 1,427;
2006: 1,522.
Net Outlays, Gross Outlays:
2007: 10,800;
2006: 10,586.
Net Outlays, Offsetting collections:
2007: (110);
2006: (106).
Net Outlays, Distributed Offsetting receipts:
2007: (164);
2006: (106).
Net Outlays:
2007: 10,526;
2006: 10,374.
The accompanying notes are an integral part of these statements.
[End of table]
Internal Revenue Service Statement of Custodial Activity For the Years
Ended September 30, 2007 and 2006 (In Billions):
Revenue Activity, Collections of Federal Tax Revenue (Note 14),
Individual income, FICA/SECA, and other:
2007: 2,202;
2006: 2,035.
Revenue Activity, Collections of Federal Tax Revenue (Note 14),
Corporate income:
2007: 395;
2006: 380.
Revenue Activity, Collections of Federal Tax Revenue (Note 14), Excise:
2007: 53;
2006: 58.
Revenue Activity, Collections of Federal Tax Revenue (Note 14), Estate
and gift:
2007: 27;
2006: 29.
Revenue Activity, Collections of Federal Tax Revenue (Note 14),
Railroad retirement:
2007: 5;
2006: 5.
Revenue Activity, Collections of Federal Tax Revenue (Note 14), Federal
unemployment:
2007: 7;
2006: 7.
Total Collections of Federal Tax Revenue:
2007: 2,689;
2006: 2,514.
Increase/(Decrease) in federal taxes receivable, net:
2007: 5;
2006: [Empty].
Total Federal Tax Revenue:
2007: 2,694;
2006: 2,514.
Distribution of Federal Tax Revenue to Treasury:
2007: 2,689;
2006: 2,514.
Increase/(Decrease) in amount due to Treasury:
2007: 5;
2006: [Empty].
Total Disposition of Federal Tax Revenue:
2007: 2,694;
2006: 2,514.
Net Federal Revenue Activity:
2007: [Empty];
2006: [Empty].
Federal Tax Refund Activity, Total Refunds of Federal Taxes Note 15):
2007: 292;
2006: 277.
Federal Tax Refund Activity, Appropriations Used for Refund of Federal
Taxes:
2007: (292);
2006: (277).
Net Federal Tax Refund Activity:
2007: [Empty];
2006: [Empty].
The accompanying notes are an integral part of these statements.
[End of table]
Internal Revenue Service:
Notes to the Financial Statements:
For the Years Ended September 30, 2007 and 2006:
Note 1. Summary of Significant Accounting Policies:
A. Reporting Entity:
The Internal Revenue Service (IRS) is a bureau of the U.S. Department
of the Treasury (Treasury). The IRS originated in 1862, when Congress
established the Office of the Commissioner of the Internal Revenue. In
1952, the Bureau was reorganized by Congress and became the Internal
Revenue Service in 1953.
The mission of the IRS is to provide America’s taxpayers with top-
quality service by helping them understand and meet their tax
responsibilities and by applying the tax law with integrity and
fairness to all.
The organizational structure of the IRS consists of organizations and
major programs which administer the tax laws and collects 95 percent of
the revenues funding the Federal government.
Organizations:
* Operating Divisions;
* National Headquarters;
* Functional Support Divisions;
* Cross-Servicing Organizations.
There are four operating divisions. Wage and Investment (W&I) is
responsible for individuals with wage and investment income only. In
addition, W&I manages submission processing for all taxpayers.
Small Business and Self-Employed (SBSE) administers compliance
activities with respect to small businesses, self-employed individuals
and others with income from sources other than wages. Tax-Exempt and
Government Entities (TEGE) is in charge of employee plans, tax exempt
organizations, and government entities. Large and Mid-Size Business
(LMSB) is responsible for corporations, sub-chapter S corporations, and
partnerships with assets greater than $10 million.
The functional support divisions are Appeals, Criminal Investigation,
Taxpayer Advocate and Chief Counsel. They are independent of the
operating divisions and other units of the IRS. Taxpayer Advocate
reports directly to Congress and Chief Counsel reports to the Secretary
of the Treasury.
National Headquarters fills the role of setting broad policy, providing
executive oversight, reviewing plans and goals of the operating units,
and developing major improvement initiatives.
Two cross-servicing organizations, Modernization and Information
Technology Services (MITS) and Agency Wide Shared Services (AWSS),
provide central support to all areas of the IRS.
Major Programs:
* Taxpayer Assistance and Education;
* Compliance;
* Filing and Account Services;
* Tax Credit Programs.
The major programs are discussed in Note 1. J., Program Costs.
B. Basis of Accounting and Presentation:
The financial statements have been prepared from the accounting records
of the IRS in conformity with accounting principles generally accepted
in the United States and in accordance with the Office of Management
and Budget (OMB) Circular No. A-136, revised June 29, 2007, Financial
Reporting Requirements. Accounting principles generally accepted for
Federal entities are the standards prescribed by the Federal Accounting
Standards Advisory Board (FASAB). FASAB is recognized by the American
Institute of Certified Public Accountants as the official accounting
standards-setting body of the Federal government.
These comparative financial statements and related notes consist of the
Balance Sheet, the Statement of Net Cost, the Statement of Changes in
Net Position, the Statement of Budgetary Resources, and the Statement
of Custodial Activity.
The accounting structure of Federal agencies is designed to reflect
both accrual and budgetary accounting transactions. Under the accrual
method of accounting, revenues are recognized when earned and expenses
are recognized when incurred, without regard to receipt or payment of
cash. Budgetary accounting facilitates compliance with legal
constraints and controls over the use of Federal funds. The Statement
of Custodial Activity is presented on the modified cash basis of
accounting. Cash collections and disbursements to Treasury are reported
on a cash basis and the change in Federal tax receivables and refunds
payable are reported on an accrual basis.
Certain assets, liabilities, earned revenues and costs have been
classified as intragovernmental throughout the financial statements and
notes. Intragovernmental is defined as exchange transactions made
between two reporting entities within the Federal government.
C. Fund Balance with Treasury:
The Fund Balance with Treasury is the aggregate of funds in the IRS’s
accounts, primarily appropriated funds, from which the IRS is
authorized to make expenditures and pay liabilities. Fund Balance with
Treasury is offset in the budgetary accounts, for the most part, by
obligated and unobligated balances.
Obligated balances not yet disbursed include accounts payable and other
accrued liabilities net of receivables, and undelivered orders.
Unobligated balances may be further broken into available and
unavailable components. Available unobligated balances represent
amounts in unexpired appropriations as of the end of the current fiscal
year. Unavailable unobligated balances represent amounts in expired
appropriations and amounts not apportioned for obligation as of the end
of the current fiscal year.
D. Other Assets:
Accounts receivable consist of amounts due to the IRS from the public
and Federal agencies. Accounts receivable are recorded and reimbursable
revenues are recognized as the services are performed and costs are
incurred. The allowance for uncollectible accounts is based on an
annual review of groups of accounts by age for accounts receivable
balances older than one year.
Advances to government agencies primarily represent funds paid to the
Treasury Working Capital Fund (WCF) and the Department of Interior
GovWorks (GovWorks). Centralized services funded through the WCF
consist primarily of telecommunications services, payroll processing,
and depreciation of property and equipment owned by the WCF. Activities
funded through GovWorks consist of the acquisition of systems
furniture. Advances to the public are cash outlays for criminal
investigations and employee travel.
Forfeited property held for sale is acquired as a result of forfeiture
proceedings or foreclosure sales to satisfy a tax liability. The
Federal Tax Lien revolving fund is used to redeem real property
foreclosed upon by a holder of a lien. The IRS may sell the property,
reimburse the revolving fund and apply the net proceeds to the
outstanding tax obligation.
E. Cash and Other Monetary Assets:
Imprest funds are maintained by Headquarters and field offices in
commercial bank accounts. Other monetary assets consist primarily of
offers in compromise, voluntary deposits received from taxpayers
pending application of the funds to unpaid tax assessments and seized
monies of less than $1 million pending the results of criminal
investigations.
F. Federal Taxes Receivable, Net and Due to Treasury:
Federal taxes receivable, net and the corresponding liability, Due to
Treasury, are not accrued until related tax returns are filed or
assessments are made by the IRS and agreed to by either the taxpayer or
the court. Additionally, the prepayments are netted against
liabilities. Accruals are made to reflect penalties and interest on
taxes receivable through the balance sheet date.
Taxes receivable consist of unpaid assessments (taxes and associated
penalties and interest) due from taxpayers. The existence of a
receivable is supported by a taxpayer agreement, such as filing of a tax
return without sufficient payment, or a court ruling in favor of the
IRS. The allowance for doubtful accounts reflects an estimate of the
portion of total taxes receivable deemed to be uncollectible.
Compliance assessments are unpaid assessments neither the taxpayer nor
a court has affirmed the taxpayer owes to the Federal government.
Examples include assessments resulting from an IRS audit or
examination in which the taxpayer does not agree with the results.
Write-offs consist of unpaid assessments for which the IRS does not
expect further collections due to factors such as taxpayers’
bankruptcy, insolvency, or death. Compliance assessments and write-offs
are not reported on the balance sheet. Statutory provisions require the
accounts to be maintained until the statute for collection expires.
Tax Assessments and Abatements:
Under the Internal Revenue Code (26 USC) Section 6201, the Secretary of
the Treasury is authorized and required to make inquiries,
determinations, and assessments of all taxes imposed and accruing under
any internal revenue law but have not been duly paid including
interest, additions to the tax, and assessable penalties. The Secretary
has delegated this authority to the Commissioner of the IRS. Unpaid
assessments result from taxpayers filing returns without sufficient
payments and from the IRS’s enforcement programs, such as examination,
under-reporter, substitute for return, and combined annual wage
reporting.
Under the Internal Revenue Code (26 USC) Section 6404, the Commissioner
of the IRS has authority to abate the paid or unpaid portion of an
assessed tax, interest, and penalty. Abatements occur for a number of
reasons and are a normal part of the tax administration process:
* May be allowed for a qualifying corporation claiming a net operating
loss which created a credit. The credit can be carried back to reduce a
prior year’s tax liability and amend tax returns. Additionally, the
credit can correct an assessment from an enforcement program, taxes
discharged in bankruptcy, accepted offers in compromise, penalty
abatements for reasonable cause, contested assessments made due to
mathematical or clerical errors and assessments contested after the
liability has been satisfied.
* May result in claims for refunds or a reduction of the unpaid
assessed amount.
G. Property and Equipment:
Property and equipment is recorded at historical cost. It consists of
tangible assets and software. The IRS depreciates property and
equipment on a straight line basis over its estimated useful life. In
the first and final years, one-half year depreciation is taken.
Disposals are recorded when deemed material.
The IRS capitalization policy for property and equipment is presented
by asset class and capitalization threshold.
Asset Class: ADP equipment;
Capitalization Threshold: Capitalized regardless of acquisition cost.
Asset Class: Non-ADP equipment;
Capitalization Threshold: Individual asset cost of $5 thousand or
greater.
Asset Class: Furniture;
Capitalization Threshold: Individual asset cost of $5 thousand or
greater.
Asset Class: Investigative equipment;
Capitalization Threshold: Individual asset cost of $5 thousand or
greater.
Asset Class: Vehicles;
Capitalization Threshold: Capitalized regardless of acquisition cost.
Asset Class: Major systems;
Capitalization Threshold: Projects with costs of $20 million or
greater.
Asset Class: Internal Use Software;
Capitalization Threshold: Major business systems modernization projects
independent of cost.
Asset Class: Leasehold Improvements;
Capitalization Threshold: Capitalized regardless of acquisition cost.
Asset Class: Assets under capital lease;
Capitalization Threshold: Assets with bulk cost of $50 thousand or
greater.
ADP Equipment includes related commercial off-the-shelf software. Major
systems were a category for large-scale computer systems prior to
Statement of Federal Financial Accounting Standards No. 10 (SFFAS No.
10), Accounting for Internal Use Software.
Internal Use Software captures the costs of major Business Systems
Modernization projects in accordance with SFFAS No. 10. It encompasses
software design, development and testing of projects adding significant
new functionality and long-term benefits. Costs for developing internal
use software are accumulated in work in process until a project is
placed into service, and testing and final acceptance are successfully
completed. Once completed, the costs are transferred to depreciable
property.
H. Federal Tax Refunds Payable and Due from Treasury:
Federal Tax Refunds Payable is a fully funded liability and is offset
with a corresponding asset Due from Treasury. IRS records Due from
Treasury to designate approved funding to pay year-end tax refund
liabilities. The liability account represents the Federal tax refunds
to taxpayers.
I. Financing Sources and Revenues:
Appropriations Received:
IRS receives the majority of its funding through annual, multi-year,
and no-year appropriations available for use within statutory limits
for operating and capital expenditures. Appropriations are recognized
as budgetary financing sources when the related expenses are incurred.
In FY 2007, Congress implemented a new appropriations structure which
realigned resources from three of IRS’s major operating appropriations.
The main significance was to create a separate appropriation for
Operations Support, encompassing headquarters, shared services and
information technology. Formerly, headquarters and shared services were
combined with tax return processing, while information technology had
its own appropriation.
Appropriations:
* Taxpayer Services;
* Operations Support;
* Enforcement;
* Other Appropriations.
Taxpayer Services provides funds for the direct costs of the Taxpayer
Assistance and Education and the Filing and Account Services Programs
discussed in Note 1. J., Program Costs.
Enforcement provides resources for the direct costs of the Compliance
Program discussed in Note 1. J., Program Costs. Additionally, it funds
the direct costs of administration of the Earned Income Tax Credit
Program.
Operations Support funds the indirect costs of all programs. Activities
include executive planning and direction; shared service support for
facilities, rent, utilities and security; procurement, printing and
postage; headquarters activities such as strategic planning, finance,
human resources and Equal Employment Opportunity; research and
statistics of income; and information systems, data processing and
telecommunication.
Other Appropriations include Business Systems Modernization (BSM), the
largest of these funds, and Health and Insurance Tax Credit
Administration. BSM provides resources for the planning and capital
asset acquisition of information technology to modernize IRS’s business
systems. Additionally, BSM is obligated pursuant to an expenditure plan
approved by Congress. Health and Insurance Tax Credit Administration
provides funding for health insurance and refundable tax credits to
qualified individuals.
Exchange Revenues:
Exchange revenues recognized by IRS represent reimbursements and user
fees. Reimbursements are recognized as the result of costs incurred for
services performed for Federal agencies or the public under
reimbursable agreements. User fees are derived from transactions with
the public and are recognized when the fees are collected.
Non-exchange Revenues – Earmarked Funds:
Non-exchange revenues represent amounts retained from tax collections
for payments to private collection agencies (PCAs) and for enforcement
activities. The Private Collection Agent Program authorizes contracts
with PCAs to collect delinquent taxes on behalf of IRS not to exceed 25
percent of the total taxes collected. Additionally, IRS retains 25
percent of the total taxes collected to fund enforcement activities.
Imputed Financing Sources:
Other financing sources include imputed financing sources to offset the
imputed costs recognized for goods or services received from other
Federal agencies without reimbursement from IRS. The imputed costs are
pension and other retirement benefit costs administered by the Office
of Personnel Management, costs of processing payments and collections
by the Financial Management Service and legal judgments paid by the
Treasury Judgment Fund.
J. Program Costs:
Taxpayer Assistance and Education provides services to taxpayers to
assist them in preparing correct returns. Primary activities include
tax forms and instructions; tax publications and information; taxpayer
education and outreach programs; walk-in taxpayer assistance; and the
National Distribution Center to process orders for forms and
publications. Earned revenues are primarily from enrolled agents fees.
Filing and Account Services perform functions of processing tax
returns, recording tax payments, issuing refunds, and maintaining
taxpayer accounts. Program activities include submission processing;
operating taxpayer assistance call centers and websites; and Taxpayer
Advocate. Earned revenues are primarily from the Tax Refund Offset
Program and tax return copying and verification.
Compliance manages activities to identify and correct possible errors
or underpayments. This program includes pre-filing agreements, letter
rulings and determinations; exam functions of document matching, desk
and field exams; collection functions of notices, Automated Collection
Systems and field collections; criminal investigations of tax, money
laundering and illegal drug activities; and Appeals and Chief Counsel.
Earned revenues are primarily from the Treasury Forfeiture Fund,
Financial Crimes Enforcement Network, installment agreement fees,
offers in compromise and letter rulings and determinations.
Administration of Tax Credit Programs oversees the Earned Income Tax
Credit (EITC) and Health Coverage Tax Credit (HCTC) programs. EITC
performs expanded customer service, public outreach, enforcement, and
research efforts to reduce claims and erroneous filings associated with
the program. EITC comprises the full spectrum of taxpayer services and
compliance activities. However, EITC payments actually refunded to
individuals or credited against other tax liabilities are not included
in program costs.
HCTC activities are focused on implementing the health insurance tax
credit program set out in the Trade Adjustment Assistance Reform Act of
2002 (Trade Act of 2002). These costs do not encompass payments made to
health insurance carriers on behalf of participants or tax credits
refunded to qualifying individuals.
K. Custodial Activity:
Non-exchange Revenues:
IRS collects custodial non-exchange revenues for taxes levied against
taxpayers for: individual and corporate income; Federal Insurance
Contributions Act (FICA) and Self-Employment Contribution Act (SECA);
excise, estate, gift, railroad retirement and Federal unemployment
taxes. These collections are not available to IRS for obligation or
expenditure and are recognized as custodial revenues when collected.
The disposition of these revenues are reported on the Statement of
Custodial Activity and as distribution of Federal tax revenue to the
general fund of the U.S. Treasury.
Permanent Indefinite Appropriations:
IRS was granted permanent and indefinite budgetary authority through
legislation to disburse tax refund principle and related interest as
they become due. The permanent and indefinite appropriations are not
subject to budgetary ceilings set by Congress during the annual
appropriation process. Refunds due to taxpayers are reported as Federal
Tax Refunds Payable on the Balance Sheet. IRS records an offsetting
asset, Due from Treasury, to reflect the year-end budget authority to
pay this liability.
Disbursements for tax refunds and related interest, reported on the
Statement of Custodial Activity, are offset by Appropriations Used for
Refunds. Disbursements for refunds are not a cost of IRS, but rather
a cost of the government as a whole.
L. Earmarked Funds:
Earmarked funds are financed by specifically identified revenues which
remain available over time. These specifically identified revenues are
required by statute to be used for designated activities, benefits or
purposes and must be accounted for separately from the Federal
government’s general revenues.
The Informant Payments program was further amended by the Tax Relief
and Health Care Act of 2006 (P.L.109-432), to authorize IRS to make
payments to individuals for information leading to the collection of
underpayment of taxes.
The Federal Tax Lien Revolving Fund was established pursuant to section
112(a) of the Federal Tax Lien Act of 1966, to serve as the source of
financing the redemption of real property by the United States.
The Private Collection Agent Program was established under the American
Jobs Creation Act of 2004 and authorizes IRS to enter into contracts
with private collection agencies (PCAs) to assist in the collection of
delinquent Federal tax liabilities. A portion of the collections are
retained by IRS to pay the PCAs and fund enforcement activities.
Other earmarked funds have a variety of purposes and include: Gifts to
the United States to reduce the Public Debt, Presidential Election
Campaign Fund and Reimbursement to State and Local Law Enforcement
Agency.
M. Allocation Transfer:
IRS is a party to allocation transfers from the Department of
Transportation’s Federal Highway Administration as a receiving entity.
Obligations and outlays incurred by IRS are charged to the allocation
account as it executes the delegated activity on behalf of
Transportation. Financial activity for the allocations transfers are
reported in the financial statements of Transportation.
N. Reclassifications:
Certain prior year amounts have been reclassified to conform to current
year presentation in the disclosures.
O. Change in Presentation of a Principal Financial Statement:
In the revised OMB Circular No. A-136, dated June 29, 2007, the
statement of Financing is not required to be presented as a principal
financial statement. The Statement of Financing reconciled the net cost
of operations with the obligation of budgetary resources and non-
budgetary resources. In FY 2007, the statement presentation has been
changed to a required disclosure, Reconciliation of Net Cost of
Operations to Budget, as presented in Note 16.
Note 2. Fund Balance with Treasury (In Millions):
General Funds:
2007: $1,937;
2006: $1,962.
Special Funds:
2007: 136;
2006: 99.
Revolving Funds:
2007: 6;
2006: 4.
Other Funds:
2007: (5);
2006: 1.
Fund Balance with Treasury:
2007: 2,074;
2006: 2,066.
Unobligated balances, Available:
2007: 171;
2006: 192.
Unobligated balances, Unavailable:
2007: 493;
2006: 360.
Obligated balances not yet disbursed:
2007: 1,427;
2006: 1,520.
Non-Budgetary FBWT:
2007: (17);
2006: (6).
Status of Fund Balance with Treasury:
2007: 2,074;
2006: 2,066.
[End of table]
Note 3. Other Assets:
Advances:
2007, Intragovernmental: 162;
2007, With the Public: 8;
2006, Intragovernmental: 187;
2006, With the Public: 9.
Accounts receivable, net:
2007, Intragovernmental: 17;
2007, With the Public: 7;
2006, Intragovernmental: 14;
2006, With the Public: 7.
Forfeited property held for sale:
2007, Intragovernmental: [Empty};
2007, With the Public: 2;
2006, Intragovernmental: [Empty};
2006, With the Public: 4.
Suspense:
2007, Intragovernmental: 8;
2007, With the Public: (3);
2006, Intragovernmental: 3;
2006, With the Public: (5).
Other Assets:
2007, Intragovernmental: 187;
2007, With the Public: 14;
2006, Intragovernmental: 205;
2006, With the Public: 15.
[End of table]
Note 4. Cash and Other Monetary Assets, (In Millions):
Imprest funds:
2007: 4;
2006: 4;
Other monetary assets:
2007: 161;
2006: 48;
Cash and Other Monetary Assets:
2007: 165;
2006: 52.
Note 5. Federal Taxes Receivable, Net and Due to Treasury, (In
Billions):
Gross Federal taxes receivable:
2007: 98;
2006: 91.
Allowance for doubtful accounts:
2007: (72);
2006: (70).
Federal taxes receivable, net and Due to Treasury:
2007: 26;
2006: 21.
[End of table]
Federal taxes receivable consists of tax assessments, penalties and
interest not paid or abated which were agreed to by the taxpayer and
IRS or upheld by the courts. Federal taxes receivable, net is the
portion of gross Federal taxes receivable estimated to be collectible.
It is based on projections of collectibility from a statistical sample
of taxes receivable. The allowance for doubtful accounts was
established for the difference between the gross Federal taxes
receivable and the portion estimated to be collectible. Due to Treasury
is the offsetting liability to Federal taxes receivable, net, and
represents amounts to be transferred to Treasury when collected.
Note 6. Non-entity Assets:
Due from Treasury:
2007, Intra-Governmental: 1,675;
2007: With the Public: [Empty}];
2006, Intra-Governmental: 1,695;
2006: With the Public: [Empty].
Federal taxes receivable, net:
2007, Intra-Governmental: [Empty]
2007: With the Public: 26,000;
2006, Intra-Governmental:[Empty]
2006: With the Public: 21,000.
Other Monetary Assets:
2007, Intra-Governmental: [Empty];
2007: With the Public: 161;
2006, Intra-Governmental: [Empty];
2006: With the Public: 48.
Non-Entity Assets:
2007, Intra-Governmental: 1,675;
2007: With the Public: 26,161;
2006, Intra-Governmental: 1,695;
2006: With the Public: 21,048.
Non-entity assets are not available for IRS’s use. The IRS collects
Federal taxes receivable for the U.S. Government but does not have the
authority to spend them.
[End of table]
Note 7. Property and Equipment:
ADP assets:
Useful Life (Years): 3 to 7;
Cost: $1,777;
Accumulated Depreciation: $(1,336);
2007 Net Book Value: $441;
2006 Net Book Value: $499.
Internal use software:
Useful Life (Years): 7 to 17;
Cost: 773;
Accumulated Depreciation: (335);
2007 Net Book Value: 438;
2006 Net Book Value: 479.
Leasehold improvements:
Useful Life (Years): 10;
Cost: 475;
Accumulated Depreciation: (310):
2007 Net Book Value: 165;
2006 Net Book Value: 179.
Major systems:
Useful Life (Years): 7;
Cost: 422;
Accumulated Depreciation: (420);
2007 Net Book Value: 2;
2006 Net Book Value: 32.
Internal use software – work in process
Useful Life (Years): [Empty];
Cost: 99;
Accumulated Depreciation: [Empty];
2007 Net Book Value: 99;
2006 Net Book Value: 41.
Vehicles:
Useful Life (Years): 5;
Cost: 82;
Accumulated Depreciation: (55);
2007 Net Book Value: 27;
2006 Net Book Value: 18.
Furniture and non-ADP equipment:
Useful Life (Years): 8 to 10;
Cost: 64;
Accumulated Depreciation: (52);
2007 Net Book Value: 12;
2006 Net Book Value: 15.
Assets Under Capital Lease:
Useful Life (Years): 4 to 10;
Cost: 20;
Accumulated Depreciation: (11);
2007 Net Book Value: 9;
2006 Net Book Value: 15.
Investigative equipment:
Useful Life (Years): 10;
Cost: 9;
Accumulated Depreciation: (8);
2007 Net Book Value: 1;
2006 Net Book Value: 2.
Property and Equipment:
Useful Life (Years): [Empty];
Cost: $3,721;
Accumulated Depreciation: $(2,527);
2007 Net Book Value: $1,194;
2006 Net Book Value: $1,280.
The Cost column represents the historical cost of property and
equipment, net of disposals. The cost basis for FY 2007 and FY 2006 is
$3,721 million and $3,529 million, respectively. Accumulated
depreciation for FY 2007 and FY 2006 is $2,527 million and $2,249
million, respectively.
The IRS has 13 internal use software projects, including deployed and
work in process.
* Modernized E-File is an electronic filing system for tax returns.
* Customer Account Data Engine (CADE) is a project to replace IRS’s
master files for taxpayer accounts.
* Account Management Services (AMS) will support users with CADE access
and query capabilities.
* Integrated Financial System (IFS) is an administrative financial
system.
* E-Services is a system of web-based products and services for tax
practitioners and the public.
* Enterprise Systems Management (ESM) and Security and Technology
Infrastructure Release (STIR) create new information technology
security infrastructure.
* Filing & Payment Compliance provides functionality to enable private
debt collection and manage delinquent tax cases.
* Customer Communications is a customer service telephone system.
* Internet Refund Fact of Filing allows taxpayers to review the status
of their refund.
* Examination Desktop Support System (EDSS) is new examination software
to be used by revenue agents, tax compliance officers and tax examiners
in the SBSE division.
* Correspondence Exam Automated Support (CEAS) will centralize and
automate the processing of examination correspondence.
* The Custodial Detail Database (CDDB) provides the functionality
needed for custodial financial management reporting.
Table: Deployed Internal Use Software (In Millions):
Modernized E-File:
Cost: $165;
Accumulated Depreciation: $(62);
2007 Net Book Value: $103;
2006 Net Book Value: $102.
CADE:
Cost: 148;
Accumulated Depreciation: (47);
2007 Net Book Value: 101;
2006 Net Book Value: 105.
Integrated Financial System:
Cost: 147;
Accumulated Depreciation: (52);
2007 Net Book Value: 95;
2006 Net Book Value: 115.
E-Services:
Cost: 141;
Accumulated Depreciation: (71);
2007 Net Book Value: 70;
2006 Net Book Value: 91.
STIR:
Cost: 76;
Accumulated Depreciation: (49);
2007 Net Book Value: 27;
2006 Net Book Value: 38.
Filing and Payment Compliance:
Cost: 28;
Accumulated Depreciation: (3);
2007 Net Book Value: 25;
2006 Net Book Value: 3.
Customer Communications:
Cost: 25;
Accumulated Depreciation: (22);
2007 Net Book Value: 3;
2006 Net Book Value: 7.
Enterprise Systems Management:
Cost: 16;
Accumulated Depreciation: (10);
2007 Net Book Value: 6;
2006 Net Book Value: 8.
Internet Refund Fact of Filing:
Cost: 15;
Accumulated Depreciation: (9);
2007 Net Book Value: 6;
2006 Net Book Value: 8.
Other:
Cost: 12;
Accumulated Depreciation: (10);
2007 Net Book Value: 2;
2006 Net Book Value: 2.
Deployed Internal Use Software:
Cost: $773;
Accumulated Depreciation: $(335);
2007 Net Book Value: $438;
2006 Net Book Value: $479.
[End of table]
Work in Process Internal Use Software (In Millions):
CADE:
2007: $57;
2006: $10.
AMS:
2007: $23;
2006: [Empty].
Modernized E-File:
2007: $7;
2006: $16.
EDSS:
2007: $6;
2006: [Empty[.
CEAS:
2007: $4;
2006: [Empty].
CDDB:
2007: $2;
2006: [Empty].
Filing & Payment Compliance:
2007: [Empty];
2006: $15.
Work in Process Internal Use Software:
2007: $99;
2006: $41.
[End of table]
Note 8. Other Liabilities (In Millions):
Intragovernmental: Accrued expenses;
2007, Current: $23;
2007, Non-Current: [Empty];
2007: Total: $23.
Intragovernmental: Accrued payroll and benefits;
2007, Current: 55;
2007, Non-Current: [Empty];
2007: Total: 55.
Intragovernmental: Accrued FECA liability;
2007, Current: 43;
2007, Non-Current: 55;
2007: Total: 98.
Intragovernmental: Other Liabilities;
2007, Current: 121;
2007, Non-Current: 55;
2007: Total: 176.
With the Public: Accounts payable;
2007, Current: 86;
2007, Non-Current: [Empty];
2007: Total: 86.
With the Public: Accrued expenses;
2007, Current: 208;
2007, Non-Current: [Empty];
2007: Total: 208.
With the Public: Accrued payroll and benefits;
2007, Current: 281;
2007, Non-Current: [Empty];
2007: Total: 281.
With the Public: Actuarial FECA liability;
2007, Current: [Empty];
2007, Non-Current: 465;
2007: Total: 465.
With the Public: Accrued annual leave;
2007, Current: 480;
2007, Non-Current: [Empty];
2007: Total: 480.
With the Public: Other custodial liabilities;
2007, Current: 161;
2007, Non-Current: {Empty];
2007: Total: 161.
With the Public: Net Capital lease liability (Note 9);
2007, Current: [Empty];
2007, Non-Current: 3;
2007: Total: 3.
With the Public: Installment agreement liability;
2007, Current: 8;
2007, Non-Current: [Empty];
2007: Total: 8.
With the Public: Other Liabilities;
2007, Current: $1,224;
2007, Non-Current: $468;
2007: Total: $1,692.
Intragovernmental: Accrued expenses;
2006, Current: $30;
2006, Non-Current: [Empty];
2006: Total: $30.
Intragovernmental: Accrued payroll and benefits;
2006, Current: 51;
2006, Non-Current: [Empty];
2006: Total: 51.
Intragovernmental: Accrued FECA liability;
2006, Current: 41;
2006, Non-Current: 55;
2006: Total: 96.
Intragovernmental: Net Capital lease liability (Note 9);
2006, Current: 1;
2006, Non-Current: [Empty];
2006: Total: 1.
Intragovernmental: Other Liabilities;
2006, Current: 123;
2006, Non-Current: 55;
2006: Total: 178.
With the Public: Accounts payable;
2006, Current: 99;
2006, Non-Current: [Empty];
2006: Total: 99.
With the Public: Accrued expenses;
2006, Current: 208;
2006, Non-Current: [Empty];
2006: Total: 208.
With the Public: Accrued payroll and benefits;
2007, Current: 193;
2007, Non-Current: [Empty];
2007: Total: 193.
With the Public: Actuarial FECA liability;
2006, Current: [Empty];
2006, Non-Current: 487;
2006: Total: 487.
With the Public: Accrued annual leave;
2006, Current: 478;
2006, Non-Current: [Empty];
2006: Total: 478.
With the Public: Other custodial liabilities;
2006, Current: 48;
2006, Non-Current: {Empty];
2006: Total: 48.
With the Public: Net Capital lease liability (Note 9);
2006, Current: 1;
2006, Non-Current: 3;
2006: Total: 4.
With the Public: Contingent liabilities;
2006, Current: 2;
2006, Non-Current: [Empty];
2006: Total: 2.
With the Public: Other Liabilities;
2006, Current: $1,051;
2006, Non-Current: $490;
2006: Total: $1,541.
[End of table]
Liabilities Not Covered by Budgetary Resources (In Millions):
Actuarial FECA liability:
2007 Intra-Governmental: [Empty];
2007 With the Public: $465;
2006 Intra-Governmental: [Empty];
2006 With the Public: $487.
Accrued annual leave:
2007 Intra-Governmental: [Empty];
2007 With the Public: 480;
2006 Intra-Governmental: [Empty];
2006 With the Public: 478.
Accrued FECA liability:
2007 Intra-Governmental: 98;
2007 With the Public: [Empty];
2006 Intra-Governmental: 96;
2006 With the Public: [Empty].
Installment agreement liability:
2007 Intra-Governmental: [Empty];
2007 With the Public: [Empty];
2006 Intra-Governmental: 8;
2006 With the Public: [Empty].
Contingent liabilities:
2007 Intra-Governmental: [Empty];
2007 With the Public: [Empty];
2006 Intra-Governmental: [Empty];
2006 With the Public: 2.
Liabilities Not Covered by Budgetary Resources:
2007 Intra-Governmental: 98;
2007 With the Public: 953;
2006 Intra-Governmental: 96;
2006 With the Public: 967.
Liabilities not covered by budgetary resources include liabilities for
which congressional action is needed before budgetary resources can be
provided. Although future appropriations to fund these liabilities are
likely, it is not certain appropriations will be enacted to fund these
liabilities.
[End of table]
Note 9. Leases (In Millions):
ADP Equipment:
Total: $6;
Future Payments Due, 2008: $3;
Future Payments Due, 2009: $3.
Future Lease Payments:
Total: 6;
Future Payments Due, 2008: 3;
Future Payments Due, 2009: 3.
Imputed Interest:
Total: (1);
Future Payments Due, 2008: (1);
Future Payments Due, 2009: [Empty].
Executory costs:
Total: (2);
Future Payments Due, 2008: (2);
Future Payments Due, 2009: [Empty].
Net Capital Lease Liability:
Total: $3;
Future Payments Due, 2008: [Empty];
Future Payments Due, 2009: $3.
The capital lease liability is covered by budgetary resources. As of
September 30, 2007 and 2006, capital lease liability was $3 million and
$5 million, respectively.
IRS leases office space, vehicles and equipment under annual operating
leases. These leases are cancelable or renewable on an annual basis at
the option of the IRS. They do not impose binding commitments on the
IRS for future rental payments on leases with terms longer than one
year.
[End of table]
Note 10. Commitments and Contingencies:
The IRS is a party to legal actions in whose outcome, if unfavorable,
could materially effect the financial statements. Management and legal
counsel have determined, for some of these actions, it is probable the
outcome will be unfavorable and losses will result. As of September 30,
2007, there was no estimated contingent liability arising from these
actions. The estimated contingent liability as of September 30, 2006
was $2 million.
For some of the legal actions to which IRS is a party, management and
legal counsel cannot determine the likelihood of an unfavorable outcome
nor can any related loss be reasonably estimated. As of September 30,
2007 and 2006, there were two cases and three cases, respectively for
which management and legal counsel are unable to determine the
likelihood of an unfavorable outcome or establish a range of potential
losses.
As of September 30, 2007 and 2006, the IRS does not have contractual
commitments for payments on obligations related to canceled
appropriations.
Note 11. Cost and Earned Revenue by Programs (In Millions):
Intragovernmental Gross Cost:
2007, Taxpayer Assistance and Education: $75;
2007, Filing and Account Services: $1,497;
2007, Compliance: $2,353;
2007, Administration of Tax Credit Programs: $41;
2007, Total: $3,966.
Gross Costs with the Public:
2007, Taxpayer Assistance and Education: 404;
2007, Filing and Account Services: 2,143;
2007, Compliance: 5,349;
2007, Administration of Tax Credit Programs: 150;
2007, Total: 8,046.
Program Costs:
2007, Taxpayer Assistance and Education: 479;
2007, Filing and Account Services: 3,640;
2007, Compliance: 7,702;
2007, Administration of Tax Credit Programs: 191;
2007, Total: 12,012.
Intragovernmental Earned Revenue:
2007, Taxpayer Assistance and Education: (1);
2007, Filing and Account Services: (8);
2007, Compliance: (41);
2007, Administration of Tax Credit Programs: [Empty];
2007, Total: (50).
Earned Revenue from the Public:
2007, Taxpayer Assistance and Education: (2);
2007, Filing and Account Services: (35);
2007, Compliance: (190);
2007, Administration of Tax Credit Programs: [Empty];
2007, Total: (227).
Program Revenue:
2007, Taxpayer Assistance and Education: (3);
2007, Filing and Account Services: (43);
2007, Compliance: (231);
2007, Administration of Tax Credit Programs: [Empty];
2007, Total: (277).
Net Cost of Operations:
2007, Taxpayer Assistance and Education: 476;
2007, Filing and Account Services: 3,597;
2007, Compliance: 7,471;
2007, Administration of Tax Credit Programs: 191;
2007, Total: 11,735.
Intragovernmental Gross Cost:
2006, Taxpayer Assistance and Education: $106;
2006, Filing and Account Services: $1,459;
2006, Compliance: $2,219;
2006, Administration of Tax Credit Programs: $45;
2006, Total: $3,829.
Gross Costs with the Public:
2006, Taxpayer Assistance and Education: 301;
2006, Filing and Account Services: 2,231;
2006, Compliance: 5,190;
2006, Administration of Tax Credit Programs: 147;
2006, Total: 7,869.
Program Costs:
2006, Taxpayer Assistance and Education: 407;
2006, Filing and Account Services: 3,690;
2006, Compliance: 7,409;
2006, Administration of Tax Credit Programs: 192;
2006, Total: 11,698.
Intragovernmental Earned Revenue:
2006, Taxpayer Assistance and Education: [Empty];
2006, Filing and Account Services: (15);
2006, Compliance: (32);
2006, Administration of Tax Credit Programs: [Empty];
2006, Total: (47).
Earned Revenue from the Public:
2006, Taxpayer Assistance and Education: (55);
2006, Filing and Account Services: (18);
2006, Compliance: (93);
2006, Administration of Tax Credit Programs: [Empty];
2006, Total: (166).
Program Revenue:
2006, Taxpayer Assistance and Education: (55);
2006, Filing and Account Services: (33);
2006, Compliance: (125);
2006, Administration of Tax Credit Programs: [Empty];
2006, Total: (231).
Net Cost of Operations:
2006, Taxpayer Assistance and Education: 352;
2006, Filing and Account Services: 3,657;
2006, Compliance: 7,284;
2006, Administration of Tax Credit Programs: 192;
2006, Total: 11,485.
The new appropriation structure, discussed in Note 1. I., Financing
Sources and Revenues, realigned funding of the IRS program costs. In FY
2006, exchange revenues derived primarily from letter rulings
and determinations were reported with their related program costs in
Taxpayer Assistance and Education. In FY 2007, these exchange revenues
were reported with their related program costs in Compliance.
[End of table]
Note 12. Statement of Budgetary Resources:
Obligations Incurred (In Millions):
Direct - Category B:
2007: $10,808;
2006: $10,634.
Reimbursable - Category B:
2007: 89;
2006: 88.
Obligations Incurred:
2007: 10,897;
2006: 10,722.
Category B apportionments distribute budgetary resources by activities
or programs and are restricted by purpose for which obligations can be
incurred.
[End of table]
Comparison of Statement of Budgetary Resources (SBR) and the
President’s Budget (In Millions):
Statement of Budgetary Resources:
Budgetary Resources: $11,274;
Obligations Incurred: $10,722;
Distributed Offsetting Receipts: $106;
Net Outlays: $10,374.
Included on SBR, not in President's Budget, Expired Funds:
Budgetary Resources: (277);
Obligations Incurred: (16);
Distributed Offsetting Receipts: [Empty];
Net Outlays: [Empty].
Included on SBR, not in President's Budget, IRS Miscellaneous Retained
Fees:
Budgetary Resources: (99);
Obligations Incurred: [Empty];
Distributed Offsetting Receipts: [Empty];
Net Outlays: [Empty].
Included on SBR, not in President's Budget, Distributed Offsetting
Receipts:
Budgetary Resources: [Empty];
Obligations Incurred: [Empty];
Distributed Offsetting Receipts: (106);
Net Outlays: 106.
Included on SBR, not in President's Budget, Other:
Budgetary Resources: 2;
Obligations Incurred: 1;
Distributed Offsetting Receipts: [Empty];
Net Outlays: 2.
Included in President's Budget, not on SBR, Tax credits and interest
refunds to taxpayers:
Budgetary Resources: 55,905;
Obligations Incurred: 55,905;
Distributed Offsetting Receipts: [Empty];
Net Outlays: 55,905.
Included in President's Budget, not on SBR, Payments to informants:
Budgetary Resources: 25;
Obligations Incurred: 25;
Distributed Offsetting Receipts: [Empty];
Net Outlays: 25.
Budget of the United States Government:
Budgetary Resources: $66,830;
Obligations Incurred: $66,637;
Distributed Offsetting Receipts: [Empty];
Net Outlays: $66,412.
[End of table]
The FY 2009 Budget of the United States Government (President’s Budget)
presenting the actual amounts for the year ended September 30, 2007 has
not been published as of the issue date of these financial statements.
The FY 2009 President’s Budget is scheduled for publication in February
2008. A reconciliation of the FY 2006 column on the Statement of
Budgetary Resources (SBR) to the actual amounts for FY 2006 in the FY
2008 President’s Budget for budgetary resources, obligations incurred,
distributed offsetting receipts, and net outlays is presented above.
The President’s Budget includes appropriations for EITC, Child Tax
Credit, HCTC, interest relating to taxpayer refunds and informant
payments totaling $56 billion. The majority of the appropriations
represent budgetary resources and outlays of payments to taxpayers for
credits that exceed the taxpayer’s income tax liability and interest
paid on refunds of collections.
There are no material differences for unobligated available balances
between the SBR and the President’s Budget.
Obligated Balances, net, End of Period (In Millions):
Undelivered orders-unpaid:
2007: $798;
2006: $932.
Budgetary accounts payable:
2007: 653;
2006: 605.
Budgetary accounts receivable:
2007: (24);
2006: (15).
Obligated Balance, net, End of Period:
2007: $1,427;
2006: $1,522.
[End of table]
Note 13. Earmarked Funds:
The IRS is responsible for the operation of certain earmarked funds.
The Private Collection Agent Program and the Federal Tax Lien Revolving
Fund are discussed in Note 1. L., Earmarked Funds.
Balance Sheet, Assets: Fund Balance with Treasury;
2007, Private Collection Agent Program: $6;
2007, Federal Tax Lien Revolving Fund: $6;
2007, Total: $12.
Balance Sheet, Assets: Other Assets;
2007, Private Collection Agent Program: [Empty];
2007, Federal Tax Lien Revolving Fund: 2;
2007, Total: 2.
Balance Sheet, Total Assets:
2007, Private Collection Agent Program: $6;
2007, Federal Tax Lien Revolving Fund: $8;
2007, Total: $14.
Liabilities and Net Position, Net Position, Unexpended Appropriations:
2007, Private Collection Agent Program: [Empty];
2007, Federal Tax Lien Revolving Fund: 6;
2007, Total: 6.
Liabilities and Net Position, Net Position, Cumulative Results of
Operations:
2007, Private Collection Agent Program: 6;
2007, Federal Tax Lien Revolving Fund: 2;
2007, Total: 8.
Total Liabilities and Net Position:
2007, Private Collection Agent Program: 6;
2007, Federal Tax Lien Revolving Fund: 8;
2007, Total: 14.
Statement of Net Cost, Gross Cost:
2007, Private Collection Agent Program: 5;
2007, Federal Tax Lien Revolving Fund: [Empty];
2007, Total: 5.
Statement of Net Cost, Net Cost of Operations:
2007, Private Collection Agent Program: 5;
2007, Federal Tax Lien Revolving Fund: [Empty];
2007, Total: 5.
Statement of Changes in Net Position, Net Position Beginning of
Period:
2007, Private Collection Agent Program: [Empty];
2007, Federal Tax Lien Revolving Fund: 8;
2007, Total: 8.
Statement of Changes in Net Position, Net Costs of Operations:
2007, Private Collection Agent Program: (5);
2007, Federal Tax Lien Revolving Fund: [Empty];
2007, Total: (5).
Statement of Changes in Net Position, Non-Exchange Revenue:
2007, Private Collection Agent Program: 11;
2007, Federal Tax Lien Revolving Fund: [Empty];
2007, Total: 11.
Statement of Changes in Net Position, Net Position End of Period:
2007, Private Collection Agent Program: 6;
2007, Federal Tax Lien Revolving Fund: 8;
2007, Total: 14.
[End of table]
Note 14. Collections of Federal Tax Revenue (In Billions):
Individual income, FICA/SECA, and other:
Tax Year 2007: $1,409*;
Tax Year 2006: $751;
Tax Year 2005: $24;
Prior Years: $18;
Collections Received, FY 2007: $2,202;
Collections Received, FY 2006: $2,035.
Corporate income:
Tax Year 2007: 253**;
Tax Year 2006: 116;
Tax Year 2005: 3;
Prior Years: 23;
Collections Received, FY 2007: 395;
Collections Received, FY 2006: 380.
Excise:
Tax Year 2007: 39;
Tax Year 2006: 14;
Tax Year 2005: [Empty];
Prior Years: [Empty];
Collections Received, FY 2007: 53;
Collections Received, FY 2006: 58.
Estate and gift:
Tax Year 2007: [Empty[;
Tax Year 2006: 16;
Tax Year 2005: 2;
Prior Years: 9;
Collections Received, FY 2007: 27;
Collections Received, FY 2006: 29.
Railroad retirement:
Tax Year 2007: 4;
Tax Year 2006: 1;
Tax Year 2005: [Empty];
Prior Years: [Empty];
Collections Received, FY 2007: 5;
Collections Received, FY 2006: 5.
Federal unemployment:
Tax Year 2007: 5;
Tax Year 2006: 2;
Tax Year 2005: [Empty];
Prior Years: [Empty];
Collections Received, FY 2007: 7;
Collections Received, FY 2006: 7.
Total:
Tax Year 2007: $1,710 (64%);
Tax Year 2006: $900 (33%);
Tax Year 2005: $29 (1%);
Prior Years: $50 (2%);
Collections Received, FY 2007: $2,689 (100%);
Collections Received, FY 2006: $2,514.
* Includes other collections of $491 million.
** Includes tax year 2008 corporate income tax receipts of $10 billion.
In FY 2007, individual income, FICA/SECA, and other taxes include $74
billion in payroll taxes collected from other Federal agencies. Of this
amount, $12 billion represents the portion paid by the employers.
[End of table]
Note 15. Federal Tax Refund Activity:
Individual income, FICA/SECA, and other:
Tax Year 2007: $2;
Tax Year 2006: $235;
Tax Year 2005: $18;
Prior Years:$6;
Disbursed, FY 2007: $261;
Disbursed, FY 2006: $246.
Corporate income:
Tax Year 2007: 1;
Tax Year 2006: 8;
Tax Year 2005: 4;
Prior Years: 15;
Disbursed, FY 2007: 28;
Disbursed, FY 2006: 31.
Excise:
Tax Year 2007: [Empty];
Tax Year 2006: 1;
Tax Year 2005: [Empty];
Prior Years: 1;
Disbursed, FY 2007: 2;
Disbursed, FY 2006: [Empty].
Estate and gift:
Tax Year 2007: [Empty];
Tax Year 2006: [Empty];
Tax Year 2005: 1;
Prior Years: [Empty];
Disbursed, FY 2007: 1;
Disbursed, FY 2006: [Empty].
Federal Tax Refund Activity:
Tax Year 2007: $3 (1%);
Tax Year 2006: $244 (83%);
Tax Year 2005: $23 (8%);
Prior Years: $22 (8%);
Disbursed, FY 2007: $292 (100%);
Disbursed, FY 2006: $277.
Individual income, FICA/SECA, and other refund amounts include EITC and
child tax credit refunds.
[End of table]
Note 16. Reconciliation of Net Cost of Operations to Budget (In
Millions):
Resources used to finance activities: Obligations Incurred;
2007: $10,897;
2006: $10,722.
Resources used to finance activities: Spending Authority from
offsetting collections and recoveries;
2007: (302);
2006: (231).
Resources used to finance activities: Offsetting receipts;
2007: (164);
2006: (106).
Resources used to finance activities: Other exchange revenues not in
budget;
2007: (40);
2006: (37).
Resources used to finance activities: Imputed financing;
2007: 1,094;
2006: 1,060.
Resources used to finance activities: Transfers in/out without
reimbursement;
2007: 13;
2006: 18.
Resources used to finance activities: Total;
2007: 11,498;
2006: 11,426.
Resources that do not fund net cost of operations: Change in goods,
services and benefits ordered but not yet received or provided;
2007: 167;
2006: (50).
Resources that do not fund net cost of operations: Costs capitalized on
the balance sheet;
2007: (292);
2006: (268).
Resources that do not fund net cost of operations: Total;
2007: (125);
2006: (318).
Costs that do not require resources in current period: Depreciation and
amortization;
2007: 370;
2006: 377.
Costs that do not require resources in current period: Decrease in
unfunded liabilities;
2007: (21);
2006: (11).
Costs that do not require resources in current period: Revaluation of
assets or liabilities;
2007: 9;
2006: 11.
Costs that do not require resources in current period: Other;
2007: 4;
2006: [Empty].
Costs that do not require resources in current period: Total;
2007: 362;
2006: 377.
Net Cost of Operations:
2007: $11,735;
2006: $11,485.
In accordance with Statement of Federal Financial Accounting Standards
No. 7 (SFFAS No. 7), Accounting for Revenue and Other Financing Sources
and Concepts for Reconciling Budgetary and Financial Accounting, a
reconciliation is required for the relationship between the budgetary
resources obligated during the period for IRS’s programs and operations
to the net cost of operations. The budgetary accounting reports the
obligations and outlays of financial resources to acquire or provide
goods and services and the accrual basis of financial accounting
reports the net cost of resources used.
[End of table]
[End of Notes]
Internal Revenue Service:
Required Supplementary Information - Unaudited:
For the Years Ended September 30, 2007 and 2006:
Schedule of Budgetary Resources by Major Budget Accounts (In Millions):
In FY 2007, Congress implemented a new appropriations structure for IRS
which realigned resources from its major operating appropriations into
new budget accounts. As a result of this realignment, the FY 2006
Schedule of Budgetary Resources by Major Budget Accounts is not
comparable and is not presented.
Budgetary Resources: Unobligated balance – beginning of period;
Fiscal Year 2007, Taxpayer Services: $154;
Fiscal Year 2007, Enforcement: $85;
Fiscal Year 2007, Operations Support: $91;
Fiscal Year 2007, Other Appropriations: $222;
Fiscal Year 2007, Total: $552.
Budgetary Resources: Recoveries of prior year unpaid obligations;
Fiscal Year 2007, Taxpayer Services: 89;
Fiscal Year 2007, Enforcement: 36;
Fiscal Year 2007, Operations Support: 44;
Fiscal Year 2007, Other Appropriations: 14;
Fiscal Year 2007, Total: 183.
Budgetary Resources: Budgetary appropriations;
Fiscal Year 2007, Taxpayer Services: 2,157;
Fiscal Year 2007, Enforcement: 4,742;
Fiscal Year 2007, Operations Support: 3,471;
Fiscal Year 2007, Other Appropriations: 406;
Fiscal Year 2007, Total: 10,776.
Budgetary Resources: Spending authority from offsetting collections;
Fiscal Year 2007, Taxpayer Services: 30;
Fiscal Year 2007, Enforcement: 48;
Fiscal Year 2007, Operations Support: 31;
Fiscal Year 2007, Other Appropriations: 10;
Fiscal Year 2007, Total: 119.
Budgetary Resources: Non-expenditure transfers, net;
Fiscal Year 2007, Taxpayer Services: 53;
Fiscal Year 2007, Enforcement: (82);
Fiscal Year 2007, Operations Support: 170;
Fiscal Year 2007, Other Appropriations: (137);
Fiscal Year 2007, Total: 4.
Budgetary Resources: Permanently not available;
Fiscal Year 2007, Taxpayer Services: (33);
Fiscal Year 2007, Enforcement: (13);
Fiscal Year 2007, Operations Support: (23);
Fiscal Year 2007, Other Appropriations: (4);
Fiscal Year 2007, Total: (73).
Budgetary Resources: Total;
Fiscal Year 2007, Taxpayer Services: $2,450;
Fiscal Year 2007, Enforcement: $4,816;
Fiscal Year 2007, Operations Support: $3,784;
Fiscal Year 2007, Other Appropriations: $511;
Fiscal Year 2007, Total: $11,561.
Status of Budgetary Resources: Obligations incurred;
Fiscal Year 2007, Taxpayer Services: 2,267;
Fiscal Year 2007, Enforcement: 4,715;
Fiscal Year 2007, Operations Support: 3,6650;
Fiscal Year 2007, Other Appropriations: 265;
Fiscal Year 2007, Total: 10,897.
Status of Budgetary Resources: Unobligated balance – available;
Fiscal Year 2007, Taxpayer Services: 11;
Fiscal Year 2007, Enforcement: 16;
Fiscal Year 2007, Operations Support: 54;
Fiscal Year 2007, Other Appropriations: 90;
Fiscal Year 2007, Total: 171.
Status of Budgetary Resources: Unobligated balance – not available;
Fiscal Year 2007, Taxpayer Services: 172;
Fiscal Year 2007, Enforcement: 85;
Fiscal Year 2007, Operations Support: 80;
Fiscal Year 2007, Other Appropriations: 156;
Fiscal Year 2007, Total: 493.
Status of Budgetary Resources: Total;
Fiscal Year 2007, Taxpayer Services: $2,450;
Fiscal Year 2007, Enforcement: $4,816;
Fiscal Year 2007, Operations Support: $3,784;
Fiscal Year 2007, Other Appropriations: $511;
Fiscal Year 2007, Total: $11,561.
Change in Obligated Balance: Obligated balance, net, beginning of
period;
Fiscal Year 2007, Taxpayer Services: 448;
Fiscal Year 2007, Enforcement: 324;
Fiscal Year 2007, Operations Support: 572;
Fiscal Year 2007, Other Appropriations: 178;
Fiscal Year 2007, Total: 1,522.
Change in Obligated Balance: Obligations incurred;
Fiscal Year 2007, Taxpayer Services: 2,267;
Fiscal Year 2007, Enforcement: 4,715;
Fiscal Year 2007, Operations Support: 3,650;
Fiscal Year 2007, Other Appropriations: 265;
Fiscal Year 2007, Total: 10,897.
Change in Obligated Balance: Gross Outlays;
Fiscal Year 2007, Taxpayer Services: (2,391);
Fiscal Year 2007, Enforcement: (4,709);
Fiscal Year 2007, Operations Support: (3,416);
Fiscal Year 2007, Other Appropriations: (287);
Fiscal Year 2007, Total: (10,800).
Change in Obligated Balance: Recoveries of prior year unpaid
obligations, actual;
Fiscal Year 2007, Taxpayer Services: (89);
Fiscal Year 2007, Enforcement: (36);
Fiscal Year 2007, Operations Support: (44);
Fiscal Year 2007, Other Appropriations: (14);
Fiscal Year 2007, Total: (183).
Change in Obligated Balance: Change in uncollected customer payments
from Federal sources;
Fiscal Year 2007, Taxpayer Services: [Empty];
Fiscal Year 2007, Enforcement: (1);
Fiscal Year 2007, Operations Support: (8);
Fiscal Year 2007, Other Appropriations: [Empty];
Fiscal Year 2007, Total: (9).
Obligated balance, net, end of period:
Fiscal Year 2007, Taxpayer Services: 235;
Fiscal Year 2007, Enforcement: 296;
Fiscal Year 2007, Operations Support: 754;
Fiscal Year 2007, Other Appropriations: 142;
Fiscal Year 2007, Total: 1,427.
Net Outlays: Gross Outlays;
Fiscal Year 2007, Taxpayer Services: 2,391;
Fiscal Year 2007, Enforcement: 4,706;
Fiscal Year 2007, Operations Support: 3,416;
Fiscal Year 2007, Other Appropriations: 287;
Fiscal Year 2007, Total: 10,800.
Net Outlays: Offsetting collections;
Fiscal Year 2007, Taxpayer Services: (30);
Fiscal Year 2007, Enforcement: (46);
Fiscal Year 2007, Operations Support: (23);
Fiscal Year 2007, Other Appropriations: (11);
Fiscal Year 2007, Total: (110).
Net Outlays: Distributed Offsetting receipts;
Fiscal Year 2007, Taxpayer Services: [Empty];
Fiscal Year 2007, Enforcement: [Empty];
Fiscal Year 2007, Operations Support: [Empty];
Fiscal Year 2007, Other Appropriations: (164);
Fiscal Year 2007, Total: (164).
Net Outlays: Total;
Fiscal Year 2007, Taxpayer Services: $2,361;
Fiscal Year 2007, Enforcement: $4,660;
Fiscal Year 2007, Operations Support: $3,393;
Fiscal Year 2007, Other Appropriations: $112;
Fiscal Year 2007, Total: $10,526.
[End of table]
Other Claims for Refunds:
Management has estimated amounts which may be paid out as other claims
for tax refunds. This estimate represents an amount (principal and
interest) which may be paid for claims pending judicial review by the
Federal courts or, internally, by Appeals. In FY 2007, the total
estimated payout (including principal and interest) for claims pending
judicial review by the Federal courts is $8.8 billion and by Appeals is
$5.9 billion. In FY 2006, the total estimated payout (including
principal and interest) for claims pending judicial review by the
Federal courts was $14.8 billion and by Appeals was $7.1 billion. To
the extent judgments against the government in these cases prompt other
similarly situated taxpayers to file similar refund claims, these
amounts could become significantly greater.
Federal Taxes Receivable, Net:
In accordance with SFFAS No. 7, some unpaid assessments do not meet the
criteria for financial statement recognition as discussed in Note 1.
F., Federal Taxes Receivable, Net and Due to Treasury. Although
compliance assessments and write-offs are not considered receivables
under Federal accounting standards, they represent legally enforceable
claims of IRS acting on behalf of the Federal government. There is,
however, a significant difference in the collection potential of these
categories.
The components of the total unpaid assessments and derivation of net
Federal taxes receivable were as follows (in billions):
Total unpaid assessments:
2007: $263;
2006: $245.
Compliance assessments:
2007: (65);
2006: (57).
Write-offs:
2007: (100);
2006: (97).
Gross Federal taxes receivable:
2007: $98;
2006: $91.
Allowance for doubtful accounts:
2007: (72);
2006: (70).
Federal taxes receivable, net:
2007: $26;
2006: $21.
[End of table]
IRS cannot reasonably estimate the amount of allowance for doubtful
accounts pertaining to its compliance assessments, and thus cannot
determine their net realizable value or the value of the preassessment
work-in-process.
To eliminate double-counting, the compliance assessments reported above
exclude trust fund recovery penalties, totaling $6 billion as of
September 30, 2007 and $9 billion as of September 30, 2006, that were
assessed against officers and directors of businesses who were involved
in the non-remittance of Federal taxes withheld from their employees.
The related unpaid assessments of those businesses are reported as
taxes receivable or write-offs, but IRS may also recover portions of
those businesses’ unpaid assessments from any and all individual
officers and directors against whom a trust fund recovery penalty is
assessed.
Internal Revenue Service:
Other Accompanying Information - Unaudited:
For the Years Ended September 30, 2007 and 2006:
Statement of Net Cost by Responsibility Segment (In Millions):
Operating divisions: WAGE;
2007: 3,048;
2006: 2,911.
Operating divisions: SBSE;
2007: 2,548;
2006: 2,491.
Operating divisions: LMSB;
2007: 821;
2006: 800.
Operating divisions: TEGE;
2007: 267;
2006: 268.
Operating divisions: Total;
2007: 6,684;
2006: 6,470.
Functional support: Appeals;
2007: 211;
2006: 209.
Functional support: Chief Counsel;
2007: 319;
2006: 322.
Functional support: Criminal Investigation;
2007: 604;
2006: 619.
Functional support: Taxpayer Advocate;
2007: 192;
2006: 186.
Functional support: Communications;
2007: 26;
2006: 24.
Functional support: Total;
2007: 1,352;
2006: 1,360.
Operating Net Cost:
2007: $8,036;
2006: $7,830.
General and Administration:
2007: 1,555;
2006: 1,721.
Information Technology:
2007: 1,766;
2006: 1,546.
Depreciation/Loss on Disposal:
2007: 378;
2006: 388.
Total Net Cost:
2007: $11,735;
2006: $11,485.
[End of table]
Child Tax Credit:
The child tax credit provided under Internal Revenue Code (26 USC)
Section 24 was originally authorized by the Taxpayer Relief Act of 1997
(Public Law 105-34). The child tax credit is a special credit for
taxpayers who work, whose earnings fall below the established allowance
ceiling, and who have a qualifying child. In FY 2007, IRS issued $16
billion in child tax credit refunds. An additional $31 billion of child
tax credits were applied to reduce taxpayer liability. In FY 2006, IRS
issued $15 billion in child tax credit refunds. An additional $32
billion of child tax credits were applied to reduce taxpayer liability.
Earned Income Tax Credit:
The EITC is a special credit for employed taxpayers whose earnings fall
below the established allowance ceiling. In FY 2007, IRS issued $38
billion in EITC refunds. In FY 2006, IRS issued $36 billion in EITC
refunds. An additional $5.1 billion and $5.4 billion of the EITC was
applied to reduce taxpayer liability for FY 2007 and FY 2006,
respectively.
Social Security and Medicare Taxes:
The Federal Insurance Contributions Act (FICA) provides for a Federal
system of old-age, survivors, disability, and hospital insurance
benefits. Payments to trust funds established for these programs are
financed by payroll taxes on employee wages and tips, employers’
matching payments, and a tax on selfemployment income.
A portion of FICA benefits involves old-age, survivors, and disability
payments. These benefits are funded by the “social security tax” which
is currently 6.2% of wages and tips up to $97,500 and an employer
matching amount of 6.2% bringing the total rate to 12.4%. These
benefits are also funded by a self-employment tax of 12.4% on self
employment income up to $97,500 for calendar year 2007. The income
ceiling for both wages and tips and self-employment income was $94,200
for calendar year 2006. Remaining benefits under FICA pertain to
hospital benefits (referred to as “Medicare”) and are funded by a
separate 1.45% tax on all wages and tips (there is no wage limit) and
the employer matching contribution of 1.45% bringing the total rate to
2.9%. Self-employed individuals pay a Medicare tax of 2.9% on all self
employment income. Social Security taxes collected by IRS were
estimated to be approximately $664 billion and $614 billion in FY 2007
and FY 2006, respectively. Medicare taxes collected by IRS were
estimated to be approximately $193 billion and $178 billion in FY 2007
and FY 2006, respectively. Social Security taxes and Medicare taxes are
included in individual income, FICA/SECA and other on the Statement of
Custodial Activity.
Tax Gap:
The tax gap is the difference between the amount of tax imposed by law
and what taxpayers actually pay on time. The tax gap arises from the
three types of noncompliance: not filing required tax returns on time
or at all (the nonfiling gap), underreporting the correct amount of tax
on timely filed returns (the underreporting gap), and not paying on
time the full amount reported on timely filed returns (the underpayment
gap). Of these three components, only the underpayment gap is observed;
the nonfiling gap and the underreporting gap must be estimated. The tax
gap, estimated to be about $345 billion for Tax Year 2001, represents
the amount of noncompliance with the tax laws. Underreporting of tax
liability accounts for 82 percent of the gap, with the remainder almost
evenly divided between nonfiling (eight percent) and underpaying (ten
percent). Part of the estimate is based on data from a study of
individual returns filed for tax year 2001. It does not include any
taxes that should have been paid on income from illegal activities.
Each instance of noncompliance by a taxpayer contributes to the tax gap,
whether or not the IRS detects it, and whether or not the taxpayer is
even aware of the noncompliance. Some of the tax gap arises from
intentional (willful) noncompliance, and some of it arises from
unintentional mistakes.
The collection gap is the cumulative amount of tax, penalties, and
interest that has been assessed over many years, but has not been paid
by a certain point in time, and which the IRS expects to remain
uncollectible. In essence, it represents the difference between the
total balance of unpaid assessments and the net taxes receivable
reported on IRS’s balance sheet. The tax gap and the collection gap are
related and overlapping concepts, but they have significant
differences. The collection gap is a cumulative balance sheet concept
for a particular point in time, while the tax gap is like an income
statement item for a single year. Moreover, the tax gap estimates
include all noncompliance, while the collection gap includes only
amounts that have been assessed (a small portion of all noncompliance).
Also, the tax gap includes only tax, while the collection gap includes
tax, penalties, and interest.
Tax Burden and Tax Expenditures:
The Internal Revenue Code provides for progressive rates of tax,
whereby higher incomes are generally subject to higher rates of tax.
The following graphs and charts present the latest available
information on income tax and adjusted gross income (AGI) for
individuals by AGI level and for corporations by size of assets. For
individuals, the information illustrates, in percentage terms, the tax
burden borne by varying AGI levels. For corporations, the information
illustrates, in percentage terms, the tax burden borne by these
entities by various sizes of their total assets. The graphs are only
representative of more detailed data and analysis available from the
Statistics of Income (SOI) office.
Total tax expenditures are the foregone Federal revenue resulting from
deductions and credits provided in the Internal Revenue Code. Since tax
expenditures directly affect funds available from government
operations, decisions to forego Federal revenue are as important as
decisions to spend Federal revenue.
Average Individual Income Tax Liability And Average Adjusted Gross
Income (AGI), Tax Year 2005:
[See PDF for image]
(All figures are estimates and based on samples provided by the
Statistics of Income (SOI) Office):
This figure is a line graph with lines depicting Average AGI and
Average income tax. The vertical axis of the graph represents
Thousands, from 0 to 600. The horizontal axis of the graph represents
amounts from under $15,000 to $200,000 or more.
Individual Income Tax Liability As A Percentage Of AGI, Tax Year 2005:
[See PDF for image]
(All figures are estimates and based on samples provided by the
Statistics of Income (SOI) Office):
This figure is a line graph depicting Adjusted Gross Income (AGI)The
vertical axis of the graph represents percentage, from 0 to 30. The
horizontal axis of the graph represents amounts from under $15,000 to
$200,000 or more.
The data depicted in both graphs is represented in the following table:
Adjusted gross income (AGI): Under $15,000;
Number of taxable returns (1) (in thousands): 36,889;
AGI (in millions): 197,723;
Total income tax (in millions): 3,239;
Average AGI per return (in whole dollars): 5,360;
Average Income tax per return (in whole dollars): 88;
Income tax as a percentage of AGI: 1.6%.
Adjusted gross income (AGI): $15,000 under $30,000;
Number of taxable returns (1) (in thousands): 29,739;
AGI (in millions): 655,562;
Total income tax (in millions): 23,308;
Average AGI per return (in whole dollars): 22,044;
Average Income tax per return (in whole dollars): 784;
Income tax as a percentage of AGI: 3.6%.
Adjusted gross income (AGI): $30,000 under $50,000;
Number of taxable returns (1) (in thousands): 24,596;
AGI (in millions): 961,071;
Total income tax (in millions): 60,187;
Average AGI per return (in whole dollars): 39,075;
Average Income tax per return (in whole dollars): 2,447;
Income tax as a percentage of AGI: 6.3%.
Adjusted gross income (AGI): $50,000 under $100,000;
Number of taxable returns (1) (in thousands): 28,867;
AGI (in millions): 2,033,408;
Total income tax (in millions): 179,382;
Average AGI per return (in whole dollars): 70,441;
Average Income tax per return (in whole dollars): 6,214;
Income tax as a percentage of AGI: 8.8%.
Adjusted gross income (AGI): $100,000 under $200,000;
Number of taxable returns (1) (in thousands): 10,831;
AGI (in millions): 1,434,585;
Total income tax (in millions): 190,599;
Average AGI per return (in whole dollars): 132,452;
Average Income tax per return (in whole dollars): 17,598;
Income tax as a percentage of AGI: 13.3%.
Adjusted gross income (AGI): $200,000 or more;
Number of taxable returns (1) (in thousands): 3,541;
AGI (in millions): 2,081,299;
Total income tax (in millions): 471,549;
Average AGI per return (in whole dollars): 587,772;
Average Income tax per return (in whole dollars): 133,168;
Income tax as a percentage of AGI: 22.7%
Adjusted gross income (AGI): Total;
Number of taxable returns (1) (in thousands): 134,463;
AGI (in millions): 7,363,648;
Total income tax (in millions): 928,264;
Average AGI per return (in whole dollars): [Empty];
Average Income tax per return (in whole dollars): [Empty];
Income tax as a percentage of AGI: [Empty].
[End of table]
Corporation Tax Liability As A Percentage Of Taxable Income Tax Year
2004 Data:
[See PDF for image]
(All figures are estimates and based on samples provided by the
Statistics of Income (SOI) Office):
This figure is a line graph depicting Size of Assets. The vertical axis
represents percentage from 0 to 40. The horizontal axis represents size
of assets from zero to $250,000 or more. The data depicted in the graph
is represented in the following table:
Total Assets (in thousands): Zero Assets;
Income subject to tax (in millions): 15,385;
Total income tax after credits (in millions): 4,076;
Percentage of income tax after credits to taxable income: 26.5%.
Total Assets (in thousands): $1 under $500;
Income subject to tax (in millions): 8,436;
Total income tax after credits (in millions): 1,536;
Percentage of income tax after credits to taxable income: 18.2%.
Total Assets (in thousands): $500 under $1,000;
Income subject to tax (in millions): 4,081;
Total income tax after credits (in millions): 960;
Percentage of income tax after credits to taxable income: 23.5%.
Total Assets (in thousands): $1,000 under $5,000;
Income subject to tax (in millions): 12,215;
Total income tax after credits (in millions): 3,519;
Percentage of income tax after credits to taxable income: 28.8%.
Total Assets (in thousands): $5,000 under $10,000;
Income subject to tax (in millions): 7,562;
Total income tax after credits (in millions): 2,446;
Percentage of income tax after credits to taxable income: 32.3%.
Total Assets (in thousands): $10,000 under $25,000;
Income subject to tax (in millions): 10,694;
Total income tax after credits (in millions): 3,511;
Percentage of income tax after credits to taxable income: 32.8%.
Total Assets (in thousands): $25,000 under $50,000;
Income subject to tax (in millions): 10,076;
Total income tax after credits (in millions): 3,282;
Percentage of income tax after credits to taxable income: 32.6%.
Total Assets (in thousands): $50,000 under $100,000;
Income subject to tax (in millions): 12,037;
Total income tax after credits (in millions): 3,918;
Percentage of income tax after credits to taxable income: 32.5%.
Total Assets (in thousands): $100,000 under $250,000;
Income subject to tax (in millions): 23,779;
Total income tax after credits (in millions): 7,529;
Percentage of income tax after credits to taxable income: 31.7%.
Total Assets (in thousands): $250,000 or more;
Income subject to tax (in millions): 753,124;
Total income tax after credits (in millions): 193,658;
Percentage of income tax after credits to taxable income: 25.7%.
Total Assets (in thousands): Total;
Income subject to tax (in millions): 857,389;
Total income tax after credits (in millions): 224,435;
Percentage of income tax after credits to taxable income: 26.2%.
[End of table]
[End of section]
Appendix I: Material Weaknesses, Significant Deficiency, and Compliance
Issues:
Material Weaknesses:
During our audits of the Internal Revenue Service's (IRS) fiscal years
2007 and 2006 financial statements, we continued to identify four
material weaknesses in internal controls. These material weaknesses
have given rise to significant management challenges that have (1)
impaired management's ability to prepare financial statements and other
financial information without extensive compensating procedures, (2)
limited the availability of reliable information to assist management
in effectively managing operations on an ongoing basis, (3) reduced
IRS's effectiveness in enforcing the Internal Revenue Code, (4)
resulted in errors in taxpayer accounts, (5) increased taxpayer burden,
and (6) reduced assurance that data processed by IRS's information
systems are reliable and appropriately protected. The issues that we
have identified and discuss in this report relate to IRS's controls
over (1) financial reporting, (2) unpaid tax assessments, (3) tax
revenue and refunds, and (4) information security. We reported on each
of these issues last year[Footnote 20] and in prior audits. We
highlight these issues and a significant deficiency related to hard-
copy tax receipts and taxpayer information in the following sections.
Less significant weaknesses we identified in IRS's system of internal
controls and its operations will be reported to IRS separately.
In previous years, we reported, as a component of the material weakness
in financial reporting, that IRS did not separately report the amounts
of revenue it collected for three of the federal government's three
largest revenue sources--Social Security, hospital insurance, and
individual income taxes. Additionally, we reported that IRS was unable
to determine, at the time of payment of excise taxes, to which trust
funds the excise tax receipts are attributable. This resulted in the
federal government depending on a complex, multistep process that is
susceptible to error to distribute excise taxes to the recipient trust
funds. IRS has taken action to address both of these issues. During
fiscal year 2007, IRS disclosed information relating to Social Security
and hospital insurance revenue sources as other accompanying
information to its financial statements, and also began presenting the
most recent available information on the amount of excise tax receipts
certified to the Airport and Airways, Black Lung Disability, and
Highway Trust Funds in its Management Discussion and Analysis.
Including more specific information on the federal government's major
revenue sources and disclosing information on excise tax distributions
enhances the usefulness of the information being reported. In addition,
in fiscal year 2007, IRS began to accelerate the timing of its
certification of excise tax receipts to recipient trust funds.[Footnote
21] Specifically, in fiscal year 2007, IRS was able to certify as
accurate 9 months of the fiscal year's excise tax receipt distributions
to the trust funds, as opposed to only 6 months of receipt
distributions as was previously the case. This, in turn, reduces the
risk to the recipient trust funds that they may not receive the
appropriate distribution of excise tax revenues within a given fiscal
year. Based on IRS's actions, we no longer consider these issues to
represent internal control deficiencies.
Financial Reporting:
In fiscal year 2007, as in prior years, IRS did not have financial
management systems adequate to enable it to accurately generate and
report, in a timely manner, the information needed to both prepare
financial statements and manage operations on an ongoing basis. To
overcome these systemic deficiencies with respect to preparation of its
annual financial statements, IRS was compelled to employ extensive
compensating procedures. During fiscal year 2007, IRS (1) did not have
an adequate general ledger system for tax-related transactions, and (2)
was unable to readily determine the costs of its activities and
programs and did not have cost-based performance information to assist
in making or justifying resource allocation decisions. Although
reliance on compensating procedures resulted in financial statements
that were fairly stated as of September 30, 2007, and 2006, they do not
afford real-time data needed to assist in managing operations on a day-
to-day basis and to provide an informed basis for making or justifying
resource allocation decisions.
Similar to our findings discussed in last year's report,[Footnote 22]
during fiscal year 2007, IRS's core general ledger system for tax-
administration-related transactions was not supported by adequate audit
trails for any of its material balances, including tax revenue, tax
refunds, and taxes receivable. Financial data related to tax revenue
and tax refund transactions were posted to IRS's core general ledger
for administration of tax activities (the Interim Revenue Accounting
Control System, or IRACS) at a summary level, and were not traceable to
source documents for individual transactions to appropriately document,
and to allow independent verification, that transactions were recorded
in conformance with the posting requirements of the U.S. Government
Standard General Ledger (SGL). In addition, IRS's reported balance for
net federal taxes receivable, which comprised over 83 percent of IRS's
total assets as reported on its fiscal year 2007 balance sheet, was not
posted to IRACS.[Footnote 23] This was because it was the product of a
complex statistical estimation process rather than the traditional
posting of individual transactions. Hence, it also was not traceable to
underlying transaction detail. Consequently, IRACS does not
substantially comply with the (1) SGL at the transaction level; (2)
Federal Financial Management Systems Requirements (FFMSR) embodied in
Office of Management and Budget (OMB) Circular No. A-127, Financial
Management Systems;[Footnote 24] or (3) requirements of the Federal
Financial Management Improvement Act of 1996 (FFMIA).
As detailed in our discussion of the material weakness in IRS's
management of unpaid tax assessments which follows, IRS is in the
process of implementing the Custodial Detail Data Base (CDDB), which is
ultimately intended to provide appropriate detail transaction
traceability for all tax-related transactions. However, while IRS
continued to make progress on CDDB in fiscal year 2007, IRS expects it
will be several years before CDDB will fully achieve this objective.
Also, IRS uses two separate general ledgers, one to account for its tax
administration activities and another to capture the funding for, and
costs of conducting, those activities. This greatly complicates efforts
to measure the cost of IRS's tax administration efforts. It remains
unclear how IRS will overcome this additional obstacle to reliably
measure the costs and benefits of its tax administration activities to
permit informed management decision making and more effectively support
related requests to Congress for resources.
During fiscal year 2006, we reported that IRS improved its cost
accounting capabilities by developing and implementing a methodology
for allocating its costs of operations to its business units. However,
we also reported that IRS was unable to either readily determine the
costs of activities and programs that involve activities in multiple
business units, such as the Automated Underreporter Program, or
segregate the costs for each activity in cases where multiple
activities are performed by a single business unit, such as the
processing of different types of tax returns.
During fiscal year 2007, IRS continued to make progress in improving
its cost accounting capabilities. Specifically, IRS issued its first
cost accounting policy in August 2007, which provides guidance on the
concepts and requirements for managerial cost accounting within IRS.
The purpose of this policy is to outline a clear set of guidelines for
IRS to use to accumulate and report on the full costs of its programs,
activities, and associated outputs to allow for better decision making.
In addition, IRS is conducting cost pilots in an effort to establish
the relationship between its costs and its products and services. IRS
does not anticipate the results of these pilots to be available until
the last quarter of fiscal year 2008. These pilots, when completed,
could help IRS to develop a practical approach to use cost information
within the Integrated Financial System (IFS) to systemically produce
managerial cost accounting data that are defensible, reliable, and
consistent. While these are positive steps, IRS at present remains
unable to readily determine the full costs of specific activities and
programs. It will likely require several years and further analysis of
the relationship between IRS's costs and its products and services
before the full potential of its cost accounting capabilities will be
realized.
Despite progress made during fiscal year 2007, the continued existence
of these financial reporting weaknesses once again compelled IRS to
expend more time and effort to maintain its accounting records and
generate financial management information than would otherwise have
been necessary. Further, despite these monumental efforts, IRS
continued to lack reliable and timely financial information to assist
in managing operations throughout fiscal year 2007. Addressing the
financial reporting deficiencies discussed above would enhance this
process by providing management the reliable and timely information
that it needs to support informed decision making without having to
resort to costly and time-consuming procedures to compensate for
information system deficiencies.
Unpaid Tax Assessments:
During fiscal year 2007, we continued to find serious internal control
issues that affected IRS's management of unpaid tax assessments.
Specifically, we continued to find (1) IRS lacked a subsidiary ledger
for unpaid tax assessments that would allow it to produce accurate,
useful, and timely information with which to manage and report
externally, and (2) errors and delays in recording taxpayer
information, payments, and other activities. While IRS is making
progress in addressing these issues, these conditions nevertheless
continued to hinder IRS's ability to effectively manage its unpaid tax
assessments.[Footnote 25]
IRS continues to lack a detailed listing, or subsidiary ledger, that
tracks and accumulates unpaid tax assessments and their status on an
ongoing basis for external reporting. IRS recognizes the seriousness of
this deficiency and is working to address this matter. In fiscal year
2006, IRS began a phased-in implementation of CDDB. One of the key
objectives of CDDB is to ultimately serve as a subsidiary ledger for
IRS's tax administration activities, including tax revenue receipts,
tax refund disbursements, and unpaid tax debt, by linking account
information in IRS's master files[Footnote 26] with IRACS. The first
phase of CDDB primarily consisted of implementing computer programs
that analyze and classify related taxpayer accounts from IRS's master
file that are associated with unpaid payroll taxes. However, these
programs only had the capability to process less complex accounts
recorded after August 2001. During fiscal year 2007, IRS enhanced CDDB
to analyze and classify a larger percentage of unpaid payroll tax
accounts, though it is still unable to process all such accounts.
Additionally, IRS enhanced CDDB to begin journalizing tax debt
information from its master files to its general ledger weekly. This is
a significant step in establishing CDDB's capability to serve as a
subsidiary ledger for unpaid tax debt. However, IRS is presently unable
to use CDDB as its subsidiary ledger for posting tax debt information
to its general ledger in a manner that ensures reliable external
reporting.
Specifically, to report balances for taxes receivable and other unpaid
tax assessments in its financial statements and required supplemental
information, IRS must continue to apply statistical sampling and
estimation techniques to master file data processed through CDDB at
year-end. Even though CDDB is capable of analyzing master file data
weekly to produce tax debt information classified into the various
financial reporting categories (taxes receivable, compliance
assessments, and write-offs), this information contains material
inaccuracies. For example, through its use of its statistical sampling
and estimation techniques, IRS identified errors necessitating over $20
billion in adjustments to the year-end gross taxes receivable balance
produced by CDDB. Thus, while the use of CDDB has refined this process,
it continued to take IRS several months to complete, required
multibillion-dollar adjustments, and produced amounts that after
adjustments were still only reliable as of the last day of the fiscal
year. Consequently, the lack of a fully functioning subsidiary ledger
continues to inhibit IRS's ability to develop reliable and timely
financial management reports useful for ongoing management decisions
and external reporting. Full operational capability of CDDB is still
several years away and depends on the successful implementation of
future system releases planned through 2009.
IRS's management of unpaid tax assessments also continued to be
hindered by inaccurate tax records. We continued to find errors and
omissions in taxpayer records resulting from IRS's failure to record
information accurately and timely. Such errors directly affect the
accuracy of the classified tax debt information produced by CDDB.
Additionally, such errors in IRS records can cause frustration to
taxpayers who either do not owe the debt or owe significantly lower
amounts.
For example, during our audit we found that IRS erroneously created a
second account for the same taxpayer when it recorded the taxpayer's
$24 million estate tax assessment into an account with an invalid
taxpayer identification number. The taxpayer had previously made
payments to fully pay the amount of the estate tax. However, because
IRS erroneously recorded the tax assessment into this second account,
it created a balance due, which triggered a notice for taxes due being
sent to the taxpayer with related penalties and interest for over $32
million. IRS identified this error when it selected the taxpayer's
account as part of its statistical sampling and estimation process for
deriving the balances of net taxes receivable and other unpaid tax
assessments for year-end financial reporting. In another example, IRS
assessed almost $5 million in penalties against a business for failing
to provide a required supporting schedule along with its quarterly
payroll tax return. When IRS subsequently examined the taxpayer's
return, it determined that the required schedule was in fact attached
to the return. In both of these cases, IRS subsequently identified and
corrected its error, but not before inconveniencing the taxpayers.
Additionally, IRS had to make multimillion-dollar adjustments to the
account balances because these errors were in IRS's master file records
at the point in time that IRS extracted the account information to
estimate and record its balance of taxes receivable and other unpaid
tax assessments for year-end financial reporting.
As in prior years,[Footnote 27] we continued to find errors involving
IRS's failure to properly record payments to all related taxpayer
accounts associated with unpaid payroll taxes.[Footnote 28] IRS's
current systems continued to be unable to automatically link each of
the multiple tax assessments made for the one tax liability.
Consequently, if the business or any officer of that business paid some
or all of the outstanding taxes, IRS's systems were unable to
automatically reflect the payment as a reduction in the amounts owed on
any related accounts. Over the past several years, IRS has taken
several steps to compensate for the lack of an automated link between
related accounts. For example, IRS manually inputs a code in each
account that cross-references it to other related accounts. In
addition, since August 2001, IRS has established procedures to more
clearly link each penalty assessment against an officer to a specific
tax period of the business account. In July 2003, IRS also began
phasing
in the use of an automated trust fund recovery penalty system that is
intended to properly cross-reference payments received and thus
eliminate the opportunity for errors that plague the current manual
process.
Although IRS is making improvements in its processes for recording
trust fund recovery penalties, our work in fiscal year 2007 continued
to find deficiencies in this process, leading to errors in taxpayers'
accounts. In our testing of 76 statistically selected payments recorded
on trust fund recovery penalty accounts established since August 2001,
we found 9 instances in which IRS did not properly record payments
received on all related taxpayer accounts. Based on our testing, we
estimate that about 12 percent of trust fund recovery penalty payment
transactions posted to accounts established since August 2001 could
contain inaccuracies.[Footnote 29]
IRS processing errors or delays also contribute to inaccurate tax
records and result in IRS having to make adjustments as part of its
process for estimating the balances of net taxes receivable and other
unpaid tax assessments, which IRS reports on its balance sheet and the
required supplemental information to its financial statements,
respectively. During our audit, we found a case where a taxpayer signed
a document in November 2006 agreeing to $1.4 million of additional
taxes owed. However, as of July 2007, IRS had not recorded this tax
assessment on the taxpayer's master file account. Since this was a
valid tax assessment agreed to by the taxpayer and established during
fiscal year 2007, IRS had to make a $1.4 million adjustment to the
balance in the taxpayer's account.
Furthermore, such processing errors and delays contribute to IRS's
inability to timely release federal tax liens against taxpayers once
taxpayers have fully satisfied or are otherwise relieved of their tax
liability. As with the other issue previously described, delays by IRS
in recording bankruptcy discharges and in researching and applying
taxpayer payments that cover multiple tax periods result not only in
inaccurate tax records but delays in IRS's release of federal tax
liens. This, in turn, causes undue hardship and burden to taxpayers who
are attempting to sell property or apply for commercial
credit.[Footnote 30]
The progress IRS has made to date with CDDB is an important step in
moving toward a subsidiary ledger that links account information in
IRS's master files with its general ledger for tax administration
activities. However, IRS must still address the issues that prevent it
from using unadjusted CDDB information to support the general ledger
for external reporting. This will require further enhancements to CDDB
to enable it to more accurately distinguish between the three
categories of unpaid tax assessments--taxes receivable, compliance
assessments, and write-offs--so that balances are ultimately recorded
in the proper general ledger accounts. Also, in order to ensure
accurate financial reporting and to minimize undue burden on taxpayers,
IRS faces a continuing challenge to address the factors that cause
inaccuracies in taxpayer account records and to maintain the integrity
of the account information going forward.
Tax Revenue and Refunds:
During fiscal year 2007, we continued to find that IRS's internal
controls were not fully effective in ensuring that it is maximizing the
federal government's ability to collect tax revenues owed and
minimizing the risk of paying improper tax refunds. IRS has a broad
array of operational management information available to it and has
used innovative approaches to develop and apply this information to
increase tax collections and reduce improper tax refunds. However, IRS
does not, at present, have agencywide cost-benefit information, related
cost-based performance measures, or a systematic process for ensuring
it is using its resources to maximize its ability to collect what is
owed and minimize the disbursements of improper tax refunds in the
context of its overall mission and responsibilities. These deficiencies
inhibit IRS's ability to appropriately assess and routinely monitor the
relative merits of its various initiatives and adjust its strategies as
needed. This, in turn, can significantly affect both the level of tax
revenue collected and the magnitude of improper refunds paid.
As of September 30, 2007, IRS's inventory of cumulative unpaid tax
assessments totaled $263 billion. Of this amount, $26 billion, about 10
percent, is estimated to be collectible.[Footnote 31] In addition,
based on data accumulated during a study of individual tax returns
filed in 2001, IRS estimated that taxes totaling about $345 billion
were not paid to the federal government. Of this amount, IRS estimates
that its enforcement efforts will eventually recover about $55 billion,
leaving a net $290 billion uncollected. With respect to improper tax
refunds, IRS successfully stopped over:
$3.1 billion in potential improper tax refund payments from 2002
through 2005.[Footnote 32] However, the magnitude of total improper tax
refunds that are not prevented and are thus paid each year is unknown.
IRS has done some targeted studies of improper refunds related to the
Earned Income Tax Credit (EITC)[Footnote 33] program, which constituted
$38 billion of the $292 billion (about 13 percent) in total refunds
paid during fiscal year 2007. Based on a study conducted of EITC claims
filed for tax year 2001, IRS estimated that at least $10 billion in
improper EITC tax refunds may have been disbursed in fiscal year
2007.[Footnote 34] However, IRS has not estimated the magnitude of
improper refunds not related to EITC, and thus the magnitude of total
improper tax refunds disbursed each year is unknown. Because of these
and other issues, we have designated enforcement of tax laws as a high-
risk area in the federal government.[Footnote 35]
In its efforts to identify and pursue the correct amount of taxes owed
and to ensure that only proper tax refunds are disbursed, IRS faces
numerous challenges, many of which are beyond its control. These
include the complexity of the tax code, the timeliness of corroborative
information, time constraints on issuing refunds, and resource
constraints. For example, the amounts of both tax liabilities due the
federal government and tax refunds due to taxpayers are based on
taxpayer interpretations of the requirements of the very complex and
frequently changing tax laws, and are submitted to IRS on tax returns
that encompass largely unsubstantiated assertions that IRS has a
limited capacity to verify. In addition, taxpayers do not always file
the required tax returns, or properly calculate and report their
taxable income. Some third-party information, such as the data provided
by taxpayers with their tax returns on W-2s[Footnote 36] and IRS 1099
forms,[Footnote 37] is also later transmitted to IRS electronically and
in that form can be used by IRS to help corroborate the amount of wages
and income reported by taxpayers. However, the electronic version of
this information is not required to be filed until after the start of
the tax filing season. Consequently, the utility of the comparison of
this information with tax return data as a tool to address improper
refunds is problematic because IRS does not have time to prepare third-
party data for matching prior to the payment of tax refund claims
related to these data. Additionally, the time available to IRS to
verify the information on tax returns claiming refunds before it must
make payment is limited by statutory requirements that tax refunds be
paid within set time constraints or be subject to interest
charges.[Footnote 38] Consequently, many of IRS's efforts have
traditionally been focused on detective controls, such as examinations
and automated matching of tax returns with third-party data to identify
for collection under reported taxes and improper tax refunds. However,
these efforts are not undertaken until months after the tax returns
have been filed and, consequently, in the case of tax returns claiming
tax refunds, do not prevent improper tax refunds from being disbursed.
While IRS faces a number of constraints that are largely beyond its
control, effectively deploying its resources should be within its
control. Like other agencies, IRS has limited resources to deploy to a
wide range of programs and activities. These programs and activities
are not only focused on enforcement of the tax law, but also on
providing various services to taxpayers, including processing tax
returns. In this context, IRS must weigh its options in terms of
deployment of its limited resources to these and other responsibilities
critical to the day-to-day operations of the agency. Additionally,
while IRS should strive to maximize collections of tax revenue and
minimize payment of improper tax refunds, we recognize that it has a
responsibility to ensure it is applying the tax code fairly. Having
agencywide cost-benefit information and cost-based performance data,
and a systematic process for using this information, would improve
IRS's ability to ensure it is, in fact, deploying its resources to most
effectively address its core mission and responsibilities. We have been
reporting on the need for IRS to have good cost benefit information for
its various collection and enforcement programs to assist in resource
allocation decision making since our fiscal year 1999 financial audit,
and have made several recommendations which remain open as of the date
of this report.[Footnote 39]
IRS has recognized the need to have sound cost-benefit data with which
to make better informed resource allocation decisions. As discussed in
the material weakness over financial reporting section, IRS has
initiated a number of cost pilots in an effort to establish a
relationship between its costs and its various activities. IRS also
recognizes that it will likely take several years before it can fully
use this information as an agencywide resource planning tool. In the
interim, IRS has undertaken initiatives to make more effective use of
existing information to better target its enforcement efforts.
For example, as we have reported in prior years, IRS does not pursue
collection action against all tax debt owed to the federal government.
IRS has "shelved" billions of dollars of the tax debt cases due to lack
of resources, and billions more are in a queue of cases that are not
being actively pursued while they wait to be assigned to a collection
official. Over the past 3 years, IRS has employed various approaches,
including sophisticated computer modeling and risk assessment
techniques, to assist it in more effectively identifying the tax debt
cases with the greatest collection potential, and to facilitate
prioritizing of these cases for collection. IRS has also employed these
techniques to identify the most effective collection approach to take
for the various types of outstanding tax debt. IRS has estimated that
several billion dollars in additional tax collections have been
realized through the use of these techniques. Although these efforts
have significantly helped IRS target cases for collection, its ability
to assess the relative merits of these efforts is hampered by its
inability to reliably measure how much it collects as a result of these
efforts, compared to their associated costs. Additionally, these
efforts are primarily focused on only one of IRS's operating divisions;
thus, they do not presently represent an agencywide, systematic
approach to managing the collection of unpaid taxes across the scope of
IRS's activities. IRS has additional projects under way to enhance its
management of tax collection cases; however, these projects are not
scheduled to be fully implemented until 2009. Thus, their full
potential is unknown.
IRS has a number of methods for identifying those taxpayers that
potentially under report their income or overstate their deductions.
For
example, IRS uses its Automated Underreporter Program (AUR) to perform
automated matches between information reported on tax returns and
related information provided electronically by third parties. Based on
these comparisons, IRS identifies thousands of potential cases of
under reported taxes every year. However, due to constraints in the
level of resources allocated to the AUR function, IRS only investigates
a portion of these cases. In deciding which cases to pursue, IRS
conducts an analysis to identify the types of cases that have
historically resulted in the largest additional tax assessments when
investigated further. This approach has yielded notable progress; for
tax year 2005,[Footnote 40] the cases IRS investigated accounted for
about 87 percent of the total dollars of potential unreported taxes
identified through these matches. This represents a substantial
increase over 2002, when IRS investigated about 48 percent of the total
dollars of potential unreported taxes. However, at present, decisions
made by AUR personnel on which cases to pursue for assessment are not
routinely linked to decisions made by collection personnel as to which
types of cases that are not immediately paid by the taxpayer will be
pursued for collection. We recognize the need for IRS to consider other
factors, such as ensuring appropriate coverage of varying types of
potential underreporter cases, in determining which ones to
investigate. However, knowledge of the collection potential of such
cases, and the costs associated with pursuing them, are also important
factors to consider in case selection. Absent this information, it is
difficult for IRS to assess fully the most appropriate level of
resources to devote to this program, or to compare it with other
various compliance initiatives in terms of cost-effectiveness.
IRS has also made significant strides in applying the information it
does have available to address the problem of improper tax refunds as
it relates to the EITC program. Specifically, by using the management
information available to it, IRS was able to identify sources of EITC
taxpayer errors and develop methods to combat abusive and fraudulent
activity that contribute to improper tax refunds. For example, an IRS
task force study found that the leading cause of errors resulting in
improper tax refunds associated with the EITC program was taxpayers
claiming nonqualified children. IRS tested the potential for reducing
the amount of improper tax refunds issued as a result of this type of
error by requiring that when filing their tax returns, selected
taxpayers document that their qualifying child lived with them for more
than half the tax year.[Footnote 41] According to IRS, the test results
suggested that the certification requirement reduced improper EITC
claims; IRS estimated that for the 25,000 taxpayers in the study, it
deterred from $5.8 million to $6.8 million in improper claims.
IRS has also begun to establish performance measures to better enable
it to assess the effectiveness of its various EITC compliance
initiatives. For example, in 2004, IRS established the Percentage of
EITC Claims Paid in Error as one of its long-term measures for the EITC
program. During fiscal years 2006 and 2007, IRS also established
measures for specific functions within the EITC program, including the
(1) EITC assessment rate from post-refund treatment program, which is
the rate of EITC dollars assessed from examination and document-
matching programs, and (2) EITC improper payment rate, which is an
estimate of the percentage of ineligible claims that are paid and not
recovered. Establishing these and other related performance measures
represents a major step forward in IRS's management of EITC compliance
and, if effectively used, could provide management with important tools
to better assess the effectiveness of its various EITC initiatives and
enable IRS to institute appropriate adjustments over time. However, IRS
has not yet implemented all the measures it established and those that
have been implemented are relatively new. Consequently, it is too early
to tell whether they will be effective tools to assist IRS in reducing
the rate of improper tax refunds as it relates to EITC.
We commend the studies and initiatives IRS has undertaken to address
aspects of this material weakness and believe important progress has
been made. However, IRS has not yet institutionalized these activities
to cover the totality of unpaid taxes and potential improper tax
refunds. Additionally, the absence of agencywide cost-benefit
information and related cost-based performance measures continues to
hamper IRS's ability to formulate a focused, effective, and efficient
strategy for the collection of unpaid taxes and prevention of improper
tax refunds.
Given the environment in which it operates, IRS cannot be expected to
collect all taxes owed or prevent all improper tax refunds claimed from
being disbursed through enhancements to its internal controls alone. As
noted earlier, the level of uncollected taxes and improper refunds is
affected by many factors beyond IRS's control. Also, in deploying its
resources to its various programs and activities, IRS must consider
other factors besides maximizing revenue collections, minimizing
improper refund payments, and minimizing costs incurred, such as
ensuring it is applying the tax code fairly and improving overall
compliance. Nevertheless, it is incumbent upon IRS to make optimum use
of its available resources and to be able to credibly demonstrate it is
doing so to Congress and the public. In fiscal year 2007, the continued
lack of reliable and timely agencywide cost-benefit information and
related cost-based performance measures, coupled with the lack of an
agencywide strategy to employ these tools, inhibited IRS's ability to
meet these objectives.
Information Security:
To effectively fulfill its tax processing responsibility, IRS relies
extensively on computerized systems to support its financial and
mission-related operations. Effective information system controls are
essential to ensuring that taxpayer and financial information is
adequately protected from inadvertent or deliberate misuse, fraudulent
use, improper disclosure, or destruction. Ineffective system controls
can impair the accuracy, completeness, and timeliness of information
used by management and, in the absence of effective compensating
procedures, increase the potential for undetected material
misstatements in the agency's financial statements.
Significant weaknesses in information security controls continue to
threaten the confidentiality, integrity, and availability of IRS's
financial processing systems and information. In fiscal year 2007, we
identified further weaknesses in controls for protecting access to
systems and information, as well as other information security controls
that affect key financial systems--particularly IFS and IRACS. For
example, sensitive information, including user IDs, passwords, and
software code for mission-critical applications, was accessible on an
internal Web site to anyone who could connect to IRS's internal
network--without having to log in to the network. The information
gained through this access could be used to alter data flowing to and
from IFS. In addition, configuration flaws in the mainframe allowed
users unrestricted access to all programs and data on the mainframe,
including IRACS. Because this access was not controlled by the security
system, no security violation logs would be created, reducing IRS's
ability to detect unauthorized access. Weaknesses also existed in other
areas, such as protecting against unauthorized physical access to
sensitive computer resources and patching servers to protect against
known vulnerabilities.
IRS has made limited progress in resolving previously reported security
weaknesses in the controls for its financial and tax processing systems
and information. To its credit, IRS implemented controls for user IDs
on certain critical servers, improved physical protection for its
procurement system, developed a security plan for IRACS, and upgraded
servers that had been using obsolete operating systems. However, IRS
has not completed corrective actions for other previously reported
weaknesses. About 70 percent of the 98 weaknesses we previously
identified that remained unresolved at the end of our fiscal year 2006
audit had not been corrected at the end of our fiscal year 2007 audit.
These weaknesses included having passwords that were not complex enough
to avoid being guessed or cracked, not physically protecting sensitive
computer resources, and not encrypting sensitive information, such as
user IDs and passwords, as it is transferred across the network. The
agency's procurement system was particularly at risk, with issues such
as not (1) appropriately restricting access to sensitive programs, (2)
logging security-relevant events to provide audit trails, and (3)
applying vendor-supplied system patches in a timely manner to protect
against known vulnerabilities. These outstanding weaknesses, along with
the new weaknesses identified during our fiscal year 2007 financial
audit, increase the risk that data processed by the agency's financial
management systems are not reliable.
A key reason for the presence of these information security weaknesses
in IRS's financial systems was that it has not yet fully implemented a
security program[Footnote 42] to ensure that controls are effectively
established and maintained. Although IRS continues to make important
progress in implementing such a program, it has not fully or
consistently implemented program requirements for key information
systems. For example, policies for monitoring security-relevant
activities on the mainframe were not adequate to ensure that critical
system changes were identified and authorized. In addition, IRS had not
updated contingency plans for key general support systems, or
documented that those plans were tested annually. Furthermore, the
plans did not identify essential IRS business processes required to be
restored if normal operations were disrupted. Until IRS takes
additional steps to fully implement key elements of its information
security program, its facilities, computing resources, and information
will remain vulnerable to inappropriate use, modification, or
disclosure, and agency management will have limited assurance of the
integrity and reliability of its financial and taxpayer information.
The newly identified deficiencies in fiscal year 2007 and the
unresolved deficiencies from prior audits represent a material weakness
in IRS's internal controls over its financial systems. Collectively,
these deficiencies reduce IRS's ability to secure its financial and
sensitive taxpayer information and, in the absence of effective
compensating procedures, increase the potential for undetected material
misstatements in the agency's financial statements. We plan to issue a
separate report on the newly identified deficiencies and the status of
previously identified IRS information security deficiencies.
Significant Deficiency:
In addition to the material weaknesses previously discussed, we
identified a significant deficiency concerning weaknesses in IRS's
internal controls over hard-copy tax receipts and taxpayer information.
Hard-Copy Tax Receipts and Taxpayer Information:
IRS manually processes hundreds of billions of dollars of hard-copy
taxpayer receipts and related taxpayer information at its service
center campuses, field office taxpayer assistance centers, other field
office units, and commercial lockbox banks.[Footnote 43] In previous
audits, we have reported that weaknesses in IRS's controls designed to
safeguard these taxpayer receipts and information increase the risk
that receipts in the form of checks, cash, and the like could be
misappropriated or that the information could be compromised.[Footnote
44] During our fiscal year 2007 audit, we identified improved controls
relating to courier security, processing of high-dollar receipts, and
control of restricted areas, which mitigated some of these weaknesses.
For example, we found that at the sites we visited, couriers
transporting taxpayer deposits to depository institutions (1) were
always on approved lists authorizing them access to taxpayer receipts
and information, (2) always returned deposit slips by the next business
day, and (3) never transported taxpayer receipts with related
individuals. In addition, we found that IRS employees followed proper
procedures when identifying high-dollar taxpayer receipts during the
extraction and candling processes.[Footnote 45] Finally, we found that
IRS strictly enforced its prohibition against bringing personal
belongings into restricted receipt processing areas.
Despite these improvements at its various processing facilities, IRS's
controls over hard-copy taxpayer receipts and related information were
not adequate to sufficiently limit the risk of theft, loss, or misuse
of these funds and information. Specifically, we found the following:
* Weaknesses in physical security controls designed to prevent
unauthorized access to IRS's receipt processing facilities. For
example, during our fiscal year 2007 audit, we observed that (1)
critical utilities, such as telephone and electrical feeds, were
vulnerable to unauthorized access and tampering (at one taxpayer
assistance center and two lockbox banks); (2) guards did not respond
timely to alarms (at two service center campuses); (3) security cameras
did not provide unobstructed 360 degree coverage of the building
exterior or the facility's external perimeter (at three service center
campuses and one lockbox bank); and (4) newly hired IRS employees were
allowed to access facilities that process taxpayer receipts and
information before proper fingerprint check results were received (53
IRS employees hired during the period October 1, 2006, through April
30, 2007).
* Weaknesses in procedural safeguards and controls designed to account
for, control, and protect taxpayer receipts. For example, during our
fiscal year 2007 audit, we found that IRS (1) was not always aware when
contractors entered taxpayer assistance centers during nonoperating
hours (at four taxpayer assistance centers), (2) was unable to provide
evidence indicating that janitorial contractors with unescorted access
to IRS facilities received favorable background investigations before
being granted access (at three taxpayer assistance centers and three
field office locations),[Footnote 46] (3) was unable to provide
evidence that contractor employees who participated in shredding
federal taxpayer information at off-site facilities received favorable
background investigations before being granted access to the
information (at five taxpayer assistance centers and three field office
locations), and (4) did not always ensure that employees receiving
taxpayer payments had adequate system access restrictions to prevent
improper recording of the payments received (at four taxpayer
assistance centers).
* Weaknesses in transfer security controls designed to safeguard hard-
copy taxpayer receipts and related taxpayer information during
transport between IRS business units and to or from third parties, such
as depository institutions and post offices. For example, during our
fiscal year 2007 audit, we found that (1) there was no evidence that
IRS employees sending packages containing taxpayer receipts and
information followed up with responsible parties at the recipient
location when document transmittal forms, which are used to
specifically identify the contents of the packages shipped, remained
unacknowledged by the recipient (at one service center campus, two
taxpayer assistance centers, and five field office locations); (2)
personally identifiable information, including federal taxpayer
information, that is sent off-site was not encrypted (at four lockbox
banks); and (3) there was no evidence documenting managerial review of
transfer-related documents[Footnote 47] (at one service center campus,
seven taxpayer assistance centers, and one field office location).
IRS's progress in addressing these issues has been hampered by a lack
of effective communication on newly implemented guidance and policies.
Although IRS issued new guidance or revised existing requirements
during fiscal year 2006 to address previously identified weaknesses, we
often continued to find the same or similar weaknesses in fiscal year
2007 because IRS staff were unaware of the recent changes. For example,
we found that most IRS employment office staff did not follow new
juvenile hiring policies and requirements; taxpayer assistance center
employees did not perform required payment and processing reviews; and,
at one service center campus, a security analyst used an incorrect and
outdated version of a security audit management checklist when
performing a review. These internal control weaknesses increase IRS's
vulnerability to theft or loss and expose taxpayers to increased risk
of losses from financial crimes committed by individuals who
inappropriately gain access to taxpayer receipts and confidential
information entrusted to IRS.
Compliance Issues:
Our work on compliance with selected provisions of laws and regulations
disclosed one instance of noncompliance that is reportable under U.S.
generally accepted government auditing standards and OMB guidance. This
instance relates to the release of federal tax liens against taxpayers'
property. We also found that IRS's financial management systems do not
substantially comply with the requirements of FFMIA.
Release of Federal Tax Liens:
The Internal Revenue Code grants IRS the power to file a lien against
the property of any taxpayer who neglects or refuses to pay all
assessed federal taxes. The lien becomes effective when it is filed
with a designated office, such as a courthouse in the county where the
taxpayer's property is located.[Footnote 48] The lien serves to protect
the interest of the federal government and as a public notice to
current and potential creditors of the government's interest in the
taxpayer's property. For example, federal tax liens are disclosed in
credit reports of individuals. Under section 6325 of the Internal
Revenue Code, IRS is required to release federal tax liens within 30
days after the date the tax liability is satisfied or has become
legally unenforceable or the Secretary of the Treasury has accepted a
bond for the assessed tax.
In our prior audits, we found that IRS did not always release the
applicable federal tax lien within 30 days of the tax liability being
either paid off or abated, as required by the Internal Revenue
Code.[Footnote 49] In response, IRS has taken a number of actions over
the past several years to improve its lien processing. For example, IRS
centralized all lien processing at its Cincinnati Service Center Campus
in 2005. In addition, in July 2006, IRS enhanced various lien
processing-related exception reports to include a cumulative list of
unresolved lien releases, allowing it to more readily track the release
status and take corrective action.
Despite the actions IRS has taken to date to improve its lien release
process, our work in fiscal year 2007 continued to find that IRS did
not always timely release all tax liens. In prior audits, we tested a
statistical sample of tax cases with liens in which the taxpayers'
total outstanding tax liabilities were either paid off or abated during
the fiscal year under audit. Beginning in fiscal year 2006, IRS began
performing its own test of the effectiveness of its lien release
process as part of implementing the requirements of the revised OMB
Circular No. A-123[Footnote 50] and we reviewed its test results. For
fiscal year 2007, we once again reviewed and validated IRS's test
results.
In its testing of 59 statistically selected tax cases with liens in
which the taxpayers' total outstanding tax liabilities were either paid
off or abated during fiscal year 2007, IRS found 7 instances in which
it did not release the applicable federal tax lien within the
statutorily mandated 30 days. The time between satisfaction of the
liability and release of the lien ranged from 35 days to 135 days.
Based on its sample, IRS estimated that for about 12 percent of unpaid
tax assessment cases in which it had filed a tax lien that were
resolved in fiscal year 2007, it did not release the lien within 30
days.[Footnote 51]
Various processing delays resulted in IRS not releasing these liens
timely. In two of these cases, IRS received the taxpayers' satisfying
payment just prior to recording the lien in its automated systems. Due
to the processing time it takes for IRS to record information into the
taxpayers' master file accounts, the payments did not post to the
taxpayers' account until after IRS recorded the filing of the liens.
Because IRS recorded the actual receipt date of the payment, which was
prior to the date it recorded the lien filing, IRS's systems did not
recognize that the payment had fully satisfied the outstanding tax
liability. Consequently, its systems did not initiate the lien release
process. In both cases, IRS released the liens only after it identified
that they had not been released during its A-123 testing. In another
case, IRS did not properly credit all of the taxpayer's outstanding
accounts when the taxpayer sent in one payment to satisfy the tax
liability of multiple tax accounts. Consequently, one of the taxpayer's
accounts remained open, even though the taxpayer satisfied the total
tax liability. This, in turn, prevented the initiation of the lien
release process for this taxpayer. In another case, IRS did not timely
update the taxpayer's account to reflect that the taxpayer had been
discharged of the taxes in bankruptcy court. In yet another case, IRS
failed to timely resolve issues with the account when it showed up on
an exception report. In the two remaining cases, IRS received the
taxpayers' satisfying payments just prior to, or during, the annual 3
week period when IRS was scheduled to perform maintenance on its master
files. During this period, IRS could not record the payment in the
taxpayers' master file accounts, which delayed the initiation of the
lien release process. This delay, in turn, resulted in IRS releasing
the liens more than 30 days after receipt of the satisfying payments.
However, the delays in these two cases exceeded the 30 day limit by
only a few days.
These issues are similar to those we reported in prior audits.[Footnote
52] We issued reports in January 2005 and May 2007 that discussed the
factors contributing to IRS's failure to timely release federal tax
liens, along with our recommendations to address those issues.[Footnote
53] The continued failure to promptly release tax liens could cause
undue hardship and burden to taxpayers who are attempting to sell
property or apply for commercial credit.
Financial Management Systems' Noncompliance With FFMIA:
In fiscal year 2007, we continued to find that IRS's financial
management systems did not substantially comply with the requirements
of FFMIA. Specifically, IRS's systems did not substantially comply with
FFMSR, federal accounting standards (U.S. generally accepted accounting
principles), and the SGL at the transaction level. We found that IRS
cannot rely solely on information from its general ledger to prepare
its financial statements because the reported balance for taxes
receivable, which accounted for over 83 percent of the assets reported
by IRS on its balance sheet as of September 30, 2007, is the product of
a complex statistical estimation process and is not supported by
transaction detail or entered into IRACS. In addition, IRS (1) does not
have an adequate audit trail from IRACS back to detailed records and
transaction source documents for any of its material tax-related
balances--tax revenues, tax refunds, and taxes receivable--and (2)
cannot produce managerial cost information consistent with Statement of
Federal Financial Accounting Standards No 4, Managerial Cost Accounting
Standards.
IRS's implementation of the first release of IFS represented a major
step forward and has provided significant benefits, such as enhanced
audit trails for nontax amounts and a cost module. However, IRS
continues to rely on obsolete systems to process tax revenues, tax
refunds, and unpaid tax assessments, including taxes receivable. IRS
will need to address the limitations of these tax administration
systems if it is to fully resolve many of its long-standing financial
management challenges. In addition, since these systems do not
interface with IFS--which accounts for and reports only IRS's nontax
administrative activities--IRS will also need to determine how to
overcome this separation to successfully apply the cost information in
IFS to its tax-related transactions. As discussed earlier, IRS has
initiated several pilot projects intended to explore ways of addressing
this issue, but the ultimate solution remains unclear.
This noncompliance with FFMIA is a result of the material weaknesses
discussed earlier in this report related to the inability of IRS's
financial management systems to produce auditable financial statements
and related disclosures that conform to U.S. generally accepted
accounting principles without substantial compensating processes and
significant adjustments, as well as IRS's continued inability to
routinely accumulate and report the full cost of its activities. Since
IRS's systems do not substantially comply with FFMSR, U.S. generally
accepted accounting principles, and the SGL, they also do not comply
with OMB Circular No. A-127, Financial Management Systems (revised Dec.
1, 2004). In its Federal Managers' Financial Integrity Act of 1982
assurance statement to Treasury, IRS reported that its financial
management systems did not substantially comply with the requirements
of FFMIA in fiscal year 2007.
IRS has established a remediation plan to address the conditions
affecting its systems' inability to substantially comply with the
requirements of FFMIA. This plan outlines the actions to be taken to
resolve these issues, but because of the long-term nature of IRS's
systems modernization efforts, which IRS expects will resolve many of
the most serious issues, many of the planned time frames exceed the 3-
year resolution period specified in FFMIA. OMB concurred with
Treasury's determination that IRS could not bring its systems into
substantial compliance within 3 years, and OMB monitors IRS's progress
in remediating its systems deficiencies on an ongoing basis.[Footnote
54]
[End of section]
Appendix II: Details on Audit Methodology:
To fulfill our responsibilities as the auditor of IRS's financial
statements, we did the following:
* We examined, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. This included selecting
statistical samples of unpaid assessment, revenue, refund, accrued
expenses, payroll, nonpayroll, property and equipment, accounts
payable, and undelivered order transactions. These statistical samples
were selected primarily to substantiate balances and activities
reported in IRS's financial statements. Consequently, dollar errors or
amounts can and have been statistically projected to the population of
transactions from which they were selected. In testing some of these
samples, certain attributes were identified that indicated deficiencies
in the design or operation of internal control. These attributes, where
applicable, can be and have been statistically projected to the
appropriate populations.
* We assessed the accounting principles used and significant estimates
made by management.
* We evaluated the overall presentation of the financial statements.
* We obtained an understanding of internal controls related to
financial reporting (including safeguarding assets) and compliance with
laws and regulations (including the execution of transactions in
accordance with budget authority).
* We obtained an understanding of the design of the internal controls
relating to the existence and completeness assertions related to the
performance measures reported in IRS's Management Discussion and
Analysis, and determined that they have been placed in operation.
* We tested relevant internal controls over financial reporting
(including safeguarding assets) and compliance, and evaluated the
design and operating effectiveness of internal controls.
* We considered IRS's process for evaluating and reporting on internal
controls and financial management systems under 31 U.S.C. § 3512 (c),
(d), commonly referred to as the Federal Managers' Financial Integrity
Act of 1982, and OMB Circular No. A-123, Management's Responsibility
for Internal Control.
* We tested compliance with selected provisions of the following laws
and regulations: Anti-Deficiency Act, as amended (31 U.S.C. §
1341(a)(1) and 31 U.S.C. § 1517(a)); Purpose Statute (31 U.S.C. §
1301); Release of lien or discharge of property (26 U.S.C. § 6325);
Interest on underpayment, nonpayment, or extensions of time for payment
of tax (26 U.S.C. § 6601); Interest on overpayments (26 U.S.C. § 6611);
Determination of rate of interest (26 U.S.C. § 6621); Failure to file
tax return or to pay tax (26 U.S.C. § 6651); Failure by individual to
pay estimated income tax (26 U.S.C. § 6654); Failure by corporation to
pay estimated income tax (26 U.S.C. § 6655); Prompt Payment Act (31
U.S.C. § 3902(a), (b), and (f) and 31 U.S.C. § 3904); Pay and Allowance
System for Civilian Employees (5 U.S.C. §§ 5332 and 5343, and 29 U.S.C.
§ 206); Federal Employees' Retirement System Act of 1986, as amended (5
U.S.C. §§ 8422, 8423, and 8432); Social Security Act, as amended (26
U.S.C. §§ 3101 and 3121 and 42 U.S.C. § 430); Federal Employees Health
Benefits Act of 1959, as amended (5 U.S.C. §§ 8905, 8906, and 8909);
Revised Continuing Appropriations Resolution, 2007, Pub. L. No. 110-5,
§§ 101, 103, 104, 21050, 21053, 121 Stat. 8, 9, 54 (Feb. 15, 2007),
which incorporates by reference certain provisions in the Department of
the Treasury Appropriations Act, 2006, Pub. L. No. 109-115, div. A,
tit. II, 119 Stat. 2432, 2436-7 (Nov. 30, 2005); and Revised Continuing
Appropriations Resolution, 2007, Pub. L. No. 110-5, §§ 21051, 21052,
121 Stat. 8, 54 (Feb. 15, 2007), which incorporates by reference
certain provisions in Title II of H.R. 5576 (109TH Congress, June 14,
2006); Department of the Treasury Appropriations Act, 2006, Pub. L. No.
109-115, div. A, tit. II, 119, Stat. 2396, 2432 (Nov. 30, 2005).
* We tested whether IRS's financial management systems substantially
comply with the three requirements of the Federal Financial Management
Improvement Act of 1996 (Pub. L. No. 104-208, div. A, § 101(f), tit.
VIII, 110 Stat. 3009, 3009-389 (Sept. 30, 1996).
[End of section]
Appendix III: Comments from the Internal Revenue Service:
Department Of The Treasury:
Deputy Commissioner:
Internal Revenue Service:
Washington, D.C. 20224:
November 5, 2007:
Mr. David M. Walker:
Comptroller General:
U.S. Government Accountability Office:
441 G Street, N.W.:
Washington, D.C. 20548:
Dear Mr. Walker:
Thank you for the opportunity to comment on the draft report titled,
Financial Audit: IRS's Fiscal Years 2007 and 2006 Financial Statements.
We are pleased that the Internal Revenue Service (IRS) received an
unqualified opinion on the combined financial statements for the eighth
consecutive year. The unqualified opinion demonstrates that the IRS
accurately accounts for approximately $2.7 trillion in tax revenue
receipts, $292 billion in tax refunds, and $11 billion in IRS
appropriated funds.
The report recognizes the significant accomplishments the IRS made this
year in addressing outstanding audit issues. It is also noteworthy that
we implemented another phase of the Custodial Detail Data Base (CDDB)
that created the interface between CDDB and Interim Revenue Accounting
Control System (IRACS) for posting to IRACS summary unpaid assessment
and accrual data.
We are dedicated to continuing to improve financial management at the
IRS, as evidenced by the following additional FY 2007 achievements:
* Conducted A-123 activities by testing transaction processes material
to Treasury's Consolidated Financial Statements, including 29
administrative processes related to $10 billion in administrative
transactions and 6 custodial tax processes related to $2 trillion in
tax revenues;
* Completed required Federal Information Security Management Act
activities, including contingency plan testing on 260 applications and
systems and live disaster recovery testing for all major applications;
* Improved the timely release of liens to 88 percent, a 19 percentage
point increase from the 69 percent timeliness rate in FY 2006;
* Achieved a 21 percent improvement in the Trust Fund Recovery Penalty
accuracy rate through the use of CDDB to resolve issues;
* Issued first published cost accounting policy;
* Improved capability to capitalize or expense assets and properly
account for Business System Modernization costs in internal use
software;
* Established the Custodial Financial Requirements Board to ensure that
custodial financial requirements are included in Business System
Modernization projects.
Improving information security continues to be a priority for the IRS.
The IRS established the Office of Privacy, Information Protection, and
Data Security to provide direction and oversight of the security and
protection of sensitive information. We also developed an integrated
Information Technology Security Schedule and Plan and a comprehensive
IRS security strategy. We encrypted all laptop data and tapes used in
electronic data exchange and implemented an enterprise anti-virus
Internet gateway solution to detect and quarantine malicious content
from invading systems.
I want to recognize the Government Accountability Office's support
throughout the audit. While challenges remain, the IRS has established
its ability to consistently produce accurate and reliable financial
statements. We have a solid management team dedicated to promoting the
highest standard of financial management, and we continue to increase
the focus on information security and internal controls while improving
financial reporting.
Sincerely,
Signed by:
Richard A. Spires
[End of section]
Footnotes:
[1] GAO, High-Risk Series: An Overview, GAO/HR-95-1 (Washington, D.C.:
February 1995).
[2] GAO, High-Risk Series: An Update, GAO-07-310 (Washington, D.C.:
January 2007).
[3] GAO-07-310.
[4] An S-corporation is a corporation with a limited number of
stockholders (100 or fewer) that elects not to be taxed as a regular
corporation and meets certain other requirements.
[5] CFO Act of 1990, Pub. L. No. 101-576, 104 Stat. 2838 (Nov. 15,
1990); Government Management Reform Act of 1994, Pub. L. No. 103-356,
108 Stat. 3410 (Oct. 13, 1994).
[6] IRS includes an estimate of the tax gap in its Management
Discussion and Analysis and in the other accompanying information to
the financial statements. This estimate is based on a study conducted
to measure the compliance rate of individual filers based on an
examination of a statistical sample of tax returns filed for tax year
2001.
[7] Tax expenditures are revenue losses--the amount of revenue that the
government forgoes--resulting from federal tax law provisions that (1)
allow a special exclusion, exemption, or deduction from gross income,
or (2) provide a special credit, preferential rate, or deferred tax
liability. Under U.S. generally accepted accounting principles, tax
expenditure amounts are not required to be disclosed as part of federal
agencies' financial statements, but certain information on tax
expenditures can be included as other accompanying information to the
financial statements.
[8] GAO, Financial Audit: Examination of IRS' Fiscal Year 1992
Financial Statements, GAO/AIMD-93-2 (Washington, D.C.: June 30, 1993).
[9] IRS's master files contain detailed records of taxpayer accounts.
However, the master files do not contain all the details necessary to
properly classify or estimate collectibility for unpaid tax assessment
accounts. There are several master files, the most significant of which
are the individual master file, which contains tax records of
individual taxpayers, and the business master file, which contains tax
records of corporations and other businesses.
[10] When a company does not pay the taxes it withholds from employees'
wages, such as Social Security or individual income tax withholdings,
IRS has the authority to assess all responsible officers individually
for the taxes withheld from employees. Although assessed to multiple
parties, the liability need only be paid once. Thus, IRS may record tax
assessments against each of several individuals for the employee-
withholding component of the payroll tax liability of a given business
in an effort to collect the total tax liability of the business. The
tax assessments made against business officers are known as trust fund
recovery penalties. See 26 U.S.C. § 6672 and implementing IRS guidance
in the Internal Revenue Manual at § 4.23.9.13, Trust Fund Recovery
Penalty (Mar. 1, 2003).
[11] Unpaid tax assessments consist of (1) federal taxes receivable,
which are taxes due from taxpayers for which IRS can support the
existence of a receivable through taxpayer agreement or a favorable
court ruling; (2) compliance assessments where neither the taxpayer nor
the court has affirmed that the amounts are owed; and (3) write-offs,
which represent unpaid tax assessments for which IRS does not expect
further collections because of factors such as the taxpayer's death,
bankruptcy, or insolvency. Of these three classifications of unpaid tax
assessments, only net federal taxes receivable are reported on the
principal financial statements.
[12] A material weakness is a significant deficiency, or a combination
of significant deficiencies, that result in more than a remote
likelihood that a material misstatement of the financial statements
will not be prevented or detected. A significant deficiency is a
control deficiency, or combination of control deficiencies, that
adversely affects the entity's ability to initiate, authorize, record,
process, or report financial data reliably in accordance with generally
accepted accounting principles such that there is more than a remote
likelihood that a misstatement of the entity's financial statements
that is more than inconsequential will not be prevented or detected.
[13] We reported this issue as a reportable condition in fiscal year
2006 and in prior years. Reportable conditions involved matters coming
to the auditor's attention that, in the auditor's judgment, should be
communicated because they represent significant deficiencies in the
design or operation of internal control, and could adversely affect an
agency's ability to meet key control objectives. In May 2006, the
American Institute of Certified Public Accountants issued Statement on
Auditing Standards (SAS) 112, and subsequently made conforming changes
to the Statements on Standards for Attestation Engagements (AT 501). AT
501 eliminated the term reportable condition and it is no longer used.
AT 501 also established standards related to a new definition for the
terms significant deficiency and material weakness, and the auditor's
responsibilities for identifying, evaluating, and communicating
matters related to an entity's internal control over financial
reporting. Under these new standards, the auditor is required to
communicate control deficiencies that are considered to be significant
deficiencies or material weaknesses in internal controls.
[14] GAO, Internal Revenue Service: Status of GAO Financial Audit and
Related Financial Management Report Recommendations, GAO-07-629
(Washington, D.C.: June 7, 2007).
[15] Tax law requires IRS to release a federal tax lien within 30 days
after the date the tax liability is satisfied or has become legally
unenforceable, or the Secretary of the Treasury has accepted a bond for
the assessed tax. 26 U.S.C. § 6325 (a).
[16] Pub. L. No. 104-208, div. A, § 101(f), title VIII, 110 Stat. 3009,
3009-389 (Sept. 30, 1996).
[17] Office of Management and Budget, Circular No. A-127, Financial
Management Systems (Washington, D.C.: Dec. 1, 2004). FFMSR require
application of the SGL at the transaction level and state that
conformance requires, among other items, that transaction detail for
SGL accounts be readily available in the financial management systems
and directly traceable to specific SGL account codes.
[18] JFMIP was originally formed under the authority of the Budget and
Accounting Procedures Act of 1950 as a cooperative undertaking of the
OMB, the Treasury, the Office of Personnel Management, and GAO, working
in cooperation with each other and with operating agencies to improve
financial management practices in the federal government. On December
1, 2004, JFMIP ceased to exist as a separate organization, with OMB's
Office of Federal Financial Management assuming many JFMIP functions.
[19] In addition to the 30 measures, data to estimate the Earned Income
Tax Credit will not be available until after the 2007 calendar year.
The two Cost and Schedule Variance measures are based on +/- 10 percent
and are reported on several project releases/subreleases.
[20] GAO, Financial Audit: IRS's Fiscal Years 2006 and 2005 Financial
Statements, GAO-07-136 (Washington, D.C.: Nov. 9, 2006).
[21] Payers of excise taxes are generally required to make semimonthly
deposits to cover their quarterly tax liability. When making tax
deposits, taxpayers identify them as excise taxes, but are not required
to provide the related specific tax-type information. Consequently, IRS
cannot classify the deposit amounts by tax type or trust fund until the
related excise tax returns are submitted. Based on information later
reported on the excise tax returns, IRS quarterly certifies excise tax
receipts to be distributed to trust funds based on the type and amount
of taxes paid and the amount of tax assessed. Because of the delay
between the end of the quarter and the receipt of the tax returns, IRS
certifies distributions of excise tax receipts to the trust funds 4-1/
2 months after the end of the tax quarter.
[22] GAO-07-136.
[23] IRS reports federal taxes receivable on its balance sheet, net of
an allowance for amounts considered uncollectible.
[24] Office of Management and Budget, Circular No. A-127, Financial
Management Systems (Washington, D.C.: Dec. 1, 2004). FFMSR require
application of the SGL at the transaction level and state that
conformance requires, among other items, that transaction detail for
SGL accounts be readily available in the financial management system
and traceable to specific SGL account codes.
[25] Unpaid tax assessments consist of (1) federal taxes receivable,
which are taxes due from taxpayers for which IRS can support the
existence of a receivable through taxpayer agreement or a favorable
court ruling; (2) compliance assessments where neither the taxpayer nor
the court has affirmed that the amounts are owed; and (3) write-offs,
which represent unpaid tax assessments for which IRS does not expect
further collections because of factors such as the taxpayer's death,
bankruptcy, or insolvency. Of these three classifications of unpaid tax
assessments, only net federal taxes receivable are reported on the
principal financial statements.
[26] IRS's master files contain detailed records of taxpayer accounts.
However, the master files do not contain all the details necessary to
properly classify or estimate collectibility for unpaid tax assessment
accounts.
[27] GAO-07-136.
[28] When a company does not pay the taxes it withholds from employees'
wages, such as Social Security or individual income tax withholdings,
IRS has the authority to assess all responsible officers individually
for the taxes withheld from employees. Although assessed to multiple
parties, the liability need only be paid once. Thus, IRS may record tax
assessments against each of several individuals for the employee-
withholding component of the payroll tax liability of a given business
in an effort to collect the total tax liability of the business. The
tax assessments made against business officers are known as trust fund
recovery penalties. See 26 U.S.C. § 6672 and implementing IRS guidance
in the Internal Revenue Manual at § 4.23.9.13, Trust Fund Recovery
Penalty (Mar. 1, 2003).
[29] We are 95 percent confident that the error rate does not exceed 20
percent.
[30] This issue is discussed further in the Compliance Issues section
of this report.
[31] The $26 billion represents those unpaid tax assessments that meet
the definition of federal taxes receivable under federal accounting
standards and which IRS expects to collect.
[32] Treasury Inspector General for Tax Administration: The Electronic
Fraud Detection System Redesign Failure Resulted in Fraudulent Returns
and Refunds Not Being Identified, 2006-20-108 (Washington, D.C.; Aug.
9, 2006).
[33] Enacted in 1975, EITC was originally intended to offset the burden
of Social Security taxes and provide a work incentive for low-income
taxpayers. The EITC, which has been modified by subsequent laws and is
codified at 26 U.S.C. § 32, is a refundable tax credit, meaning that
qualifying working taxpayers may receive a refund greater than the
amount of income tax they paid for the year.
[34] In Appendix C of OMB Circular No. A-123, which sets out guidance
implementing the Improper Payments Information Act of 2002 (IPIA), OMB
assessed the EITC program as ineffective because of the significant
level of noncompliance, and identified it as a program subject to the
reporting requirements of IPIA (Pub. L. No. 107-300, 116 Stat. 2350
(Nov. 26, 2002)), until Treasury can document a minimum of 2
consecutive years of improper payments at less than $10 million
annually. Additionally, IRS has reported EITC noncompliance as a
material weakness in its 2007 Federal Managers' Financial Integrity Act
of 1982 (FIA) assurance statement to the Treasury.
[35] GAO, High-Risk Series: An Update, GAO-07-310 (Washington, D.C.:
January 2007).
[36] IRS Form W-2 is the Wage and Tax statement, which is provided to
taxpayers by their employers and provides a record of their salary and
deductions for amounts withheld for taxes and other purposes.
[37] IRS 1099 forms are used by third parties, such as financial
institutions, to report taxpayers' interest income, dividend
distributions, and other miscellaneous income.
[38] By statute, IRS must pay interest on tax refunds not paid within
45 days of receipt or due date, whichever is later. 26 U.S.C. § 6611.
[39] GAO, Financial Audit: IRS' Fiscal Year 1999 Financial Statements,
GAO/AIMD-00-76 (Washington, D.C.: Feb. 29, 2000), and Internal Revenue
Service: Recommendations to Improve Financial and Operational
Management, GAO/01-42 (Washington, D.C.: Nov. 17, 2000); and, Internal
Revenue Service: Status of GAO Financial Audit and Related Financial
Management Report Recommendations, GAO-07-629 (Washington, D.C.: June
7, 2007).
[40] The most recent year for which complete Automated Underreporter
Program results are available.
[41] IRS rules require that the qualifying child live with the taxpayer
for more than half the tax year, but only requires the taxpayer to
substantiate residency if the taxpayer is audited by IRS.
[42] In December 2002, Congress enacted the Federal Information
Security Management Act of 2002 (FISMA), which requires agencies to
develop, document, and implement an information security program. FISMA
was enacted as title III of the E-Government Act of 2002 (Pub. L. No.
107-347, 116 Stat. 2946) (Dec. 17, 2002). This requirement was codified
at 44 U.S.C. § 3544(b).
[43] IRS's receipt processing facilities include service center
campuses, which process tax returns and payments submitted by taxpayers
and deposit tax payments in depository institutions; taxpayer
assistance centers, which accept payments from and provide assistance
directly to taxpayers; commercial lockbox banks that operate under
contract with Treasury's Financial Management Service to provide tax
receipt processing and deposit services on behalf of IRS; and other
business operating divisions that provide taxpayer audit and assistance
centers. Other business operating divisions are organized along the
following business lines: Large and Mid-Size Businesses, Small-
Business/Self-Employed, and Tax Exempt/Government Entities.
[44] See GAO-07-136; GAO, Management Report: Improvements Needed in
IRS's Internal Controls, GAO-07-689R (Washington, D.C.: May 11, 2007);
and Internal Revenue Service: Status of GAO Financial Audit and Related
Financial Management Report Recommendations, GAO-07-629 (Washington,
D.C.: June 7, 2007).
[45] In the extraction process, IRS opens the taxpayer mail it receives
and removes (1) any correspondence for appropriate follow-up, (2) tax
returns for posting to IRS records, and (3) remittances, such as
checks, money orders, and cash, for deposit in financial institutions.
Subsequent to extraction, the envelopes in which the taxpayer mail was
received are subject to further inspection known as candling, to verify
that no remittances or other taxpayer information has been overlooked.
Once candling is complete, the empty envelopes are shredded.
[46] IRS field offices can include such units as Small Business/Self-
Employed, Large and Mid-Sized Businesses, and Tax-Exempt/Government
Entities.
[47] Transfer-related documents include courier, mail, and deposit logs
and Forms 795 and 3210, which accompany taxpayer receipts and other
information shipped to other IRS locations.
[48] 26 U.S.C. §§ 6321, 6323.
[49] GAO-07-136.
[50] OMB's revised Circular No. A-123, Management's Responsibility for
Internal Control, became effective on October 1, 2005. Circular No. A-
123 provides updated internal control guidance and new requirements for
executive branch agencies to follow in conducting management's
assessment of the effectiveness of internal control over financial
reporting. Based on this assessment, agency management is required to
prepare an assurance statement on the effectiveness of internal
controls over financial reporting to be included in its performance and
accountability report. These requirements are applicable to the 24
Chief Financial Officers Act agencies, including Treasury, of which IRS
is a significant component.
[51] IRS is 95 percent confident that the percentage of cases in which
the lien was not released within 30 days does not exceed 21 percent.
[52] GAO-07-136.
[53] GAO, Opportunities to Improve Timeliness of IRS Lien Releases,
GAO-05-26R (Washington, D.C.: Jan. 10, 2005), and Management Report:
Improvements Needed in IRS's Internal Controls, GAO-07-689R
(Washington, D.C.: May 11, 2007).
[54] Section 803(c)(4) of FFMIA requires that Treasury, with the
concurrence of the Director of OMB, specify the most feasible date for
binging its systems into substantial compliance with the three FFMIA
system requirements and designate a Treasury official who shall be
responsible for bringing its systems into substantial compliance by
that date.
[End of section]
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