This is the accessible text file for GAO report number GAO-09-119 
entitled 'Financial Audit: IRS’s Fiscal Years 2008 and 2007 Financial 
Statements' which was released on November 12, 2008.

This text file was formatted by the U.S. Government Accountability 
Office (GAO) to be accessible to users with visual impairments, as part 
of a longer term project to improve GAO products' accessibility. Every 
attempt has been made to maintain the structural and data integrity of 
the original printed product. Accessibility features, such as text 
descriptions of tables, consecutively numbered footnotes placed at the 
end of the file, and the text of agency comment letters, are provided 
but may not exactly duplicate the presentation or format of the printed 
version. The portable document format (PDF) file is an exact electronic 
replica of the printed version. We welcome your feedback. Please E-mail 
your comments regarding the contents or accessibility features of this 
document to Webmaster@gao.gov. 

This is a work of the U.S. government and is not subject to copyright 
protection in the United States. It may be reproduced and distributed 
in its entirety without further permission from GAO. Because this work 
may contain copyrighted images or other material, permission from the 
copyright holder may be necessary if you wish to reproduce this 
material separately. 

United States Government Accountability Office: 
GAO: 

Report to the Secretary of the Treasury: 

November 2008: 

Financial Audit: 

IRS’s Fiscal Years 2008 and 2007 Financial Statements: 

GAO-09-119: 

GAO Highlights: 

Highlights of GAO-09-119, 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 fairly stated, and (2) IRS 
management maintained effective internal control. 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 2008 and 2007 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 balance sheet. Because of these 
and other deficiencies, IRS did not, in GAO’s opinion, maintain 
effective internal control over financial reporting 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 continued to make significant strides in addressing its financial 
management challenges and material weaknesses in internal control. 
Specifically, IRS’s progress to address control deficiencies over the 
collection of unpaid taxes and the issuance of improper refunds is such 
that GAO no longer considers the remaining control deficiencies in this 
area to constitute a material weakness. Furthermore, during fiscal year 
2008, IRS significantly improved internal controls that safeguard hard-
copy taxpayer receipts and data at primary submission processing 
locations. These improvements, combined with prior years’ progress, 
enabled GAO to conclude that remaining issues related to this activity 
no longer constitute a significant deficiency. IRS also continued to 
make progress in developing cost accounting information to capture the 
full cost of its operating activities, and in establishing a framework 
for implementing a subsidiary ledger for its tax administration 
activities. However, continued management commitment and sustained 
efforts are necessary to build on the significant progress made to date 
and to fully address remaining financial management challenges. These 
remaining challenges pertain to material weaknesses in IRS’s control 
over financial reporting, management of unpaid tax assessments, and 
information security. Also, while GAO recognized improvements in 
controls over revenue collection and refund issuance, remaining issues 
over IRS’s enforcement collection activities constituted a significant 
deficiency. Furthermore, 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. 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 future 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 continued to 
persist during fiscal year 2008. GAO will continue to monitor IRS’s 
progress in implementing the 147 recommendations that remain open as of 
the date of this report, of which 66 relate to the material weakness in 
information security. 

IRS stated that it was dedicated to improving financial management and 
cited several initiatives and related benefits. It noted that it has a 
solid management team in place to address remaining financial 
management challenges, and is committed to improving information 
security as an ongoing priority. 

To view the full product, including the scope and methodology, click on 
[hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-09-119]. For more 
information, contact Steven J. Sebastian at (202) 512-3406 or 
sebastians@gao.gov. 

[End of section] 

Contents: 
Letter: 

Auditor’s Report: 

Opinion on IRS’s Financial Statements: 

Opinion on Internal Control: 

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: 

Required Supplementary Information: 

Other Accompanying Information: 

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: 

Abbreviations: 

AMS: Account Management Services: 

ATFR: Automated Trust Fund Recovery: 

AUR: Automated Underreporter Program: 

CADE: Customer Account Data Engine: 

CDDB: Custodial Detail Data Base: 

CFO Act: Chief Financial Officers Act of 1990: 

EFTPS: Electronic Federal Tax Payment System: 

FFMIA: Federal Financial Management Improvement Act of 1966: 

FFMSR: Federal Financial Management System Requirements: 

FIA: Federal Managers’ Financial Integrity Act of 1982: 

FISMA: Federal Information Security Management Act of 2002: 

IFS: Integrated Financial System: 

IRACS: Interim Revenue Accounting Control System: 

IRS: Internal Revenue Service: 

JFMIP: Joint Financial Management Improvement Program: 

OIC: Offers in Compromise: 

OMB: Office of Management and Budget: 

SGL: U.S. Government Standard General Ledger: 

TIGTA: Treasury Inspector General for Tax Administration: 

[End of section] 

United States Government Accountability Office: 
Washington, DC 20548: 

November 10, 2008: 

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, 2008, and 2007. 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, 2008, (3) conclusion that IRS did not comply with 
one of the legal provisions 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, 2008. 

Our unqualified opinions on IRS’s fiscal years 2008 and 2007 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 ninth 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 control. This progress continued in fiscal 
year 2008. For example, in past years, we have reported a material 
weakness in IRS’s internal control over tax revenue and refunds because 
IRS’s controls were not fully effective in providing management the 
essential information it needs to make informed decisions on how best 
to optimize the use of the federal government’s resources to collect 
tax revenues owed and minimize the risk of paying improper tax refunds. 
Over the last several years, IRS has taken significant steps to address 
the deficiencies comprising this material weakness. Specifically, IRS 
has (1) made substantial progress in enhancing its cost accounting 
capabilities with a goal to determine the full cost of its activities 
at the program level, (2) further enhanced its performance measures and 
developed return on investment information for the Earned Income Tax 
Credit program that includes full costs, (3) established corporate 
governance bodies that collectively represent significant progress in 
establishing an agencywide approach to managing its tax collection 
efforts, and (4) continued to implement sophisticated computer analysis 
and modeling techniques to assist its tax collection efforts. IRS’s 
progress in addressing these issues has been such that we no longer 
consider the remaining internal control deficiencies related to revenue 
and refunds to constitute a material weakness. 

However, the deficiencies that remain do constitute a significant 
deficiency in internal control over revenue and refunds that continues 
to hamper IRS’s ability to optimize the use of its resources to collect 
unpaid taxes and minimize payment of improper refunds. Specifically, 
IRS has not developed performance metrics and goals on the cost of, and 
the revenue collected from, IRS’s enforcement programs and activities, 
and IRS has not established and implemented the financial management 
structure and processes to provide it with key financial management 
data on costs and enforcement revenue. [Footnote 1] Successfully 
addressing these issues is fundamental to IRS’s ability to determine 
how it will ultimately apply cost and enforcement revenue information 
to the management of its various enforcement functions, especially the 
collection of unpaid taxes. 

During our fiscal year 2008 audit, we also found that IRS significantly 
improved the internal control it relies on to safeguard hard-copy 
taxpayer receipts and data processed at its primary submission 
processing locations-service center campuses and lockbox banks. For 
example, IRS (1) strictly enforced its prohibition against employees 
bringing personal belongings into restricted receipt processing areas 
and strengthened controls to prevent unauthorized access to taxpayer 
receipts and information, (2) better enforced and revised its operating 
procedures for processing hard-copy taxpayer receipts and data, and (3) 
verified that couriers transporting taxpayer deposits to depository 
institutions were on approved access lists and used appropriate 
vehicles. These improvements, combined with the progress we reported in 
previous audits,[Footnote 2] enabled us to conclude that remaining 
issues related to safeguarding hard-copy taxpayer receipts and data no 
longer constitute a significant deficiency. 

IRS has also made notable progress in addressing internal control 
issues related to other material weaknesses we have reported in past 
audits. For example, based on a series of cost pilot projects it 
completed during fiscal year 2008, IRS concluded that it has the 
capability to use the cost data within its Integrated Financial System 
(IFS) and the associated workload and production data from its business 
unit systems to calculate the full costs of its products, services, and 
programs. IRS produced cost information for three of its programs and 
plans to expand the availability of cost accounting information to 
other programs in future years. In fiscal year 2009, IRS plans to 
prioritize its products and services for which cost information is 
needed and develop the necessary processes to systematically produce 
full cost information to support management decision making. We commend 
IRS for the positive steps it has taken in developing a practical 
approach to use the cost information within IFS to systematically 
produce managerial cost accounting data. Moving expeditiously to 
determine its cost accounting priorities and develop the processes to 
routinely produce the associated cost accounting data will allow IRS to 
realize the full potential of its cost accounting capabilities. 

IRS continued to make progress in its efforts to develop detailed 
subsidiary records for its tax activities, but much remains to be done 
on this multiyear effort. During fiscal year 2008, IRS instituted the 
use of trace identification numbers (trace ID) for revenue and refund 
transactions to provide detail transaction traceability for these 
activities. Such traceability is necessary to enable IRS to better 
ensure that its records are accurate, complete, and fully supported. We 
were able to verify the effectiveness of these trace IDs for refunds 
and for revenue processed through the Electronic Federal Tax Payment 
System (EFTPS). However, controls over trace IDs on non-EFTPS revenue 
transactions were not yet in place, and IRS continues to lack 
transaction traceability or effective subsidiary records for taxes 
receivable, which comprised over 81 percent of the assets and 
liabilities reported in its fiscal year 2008 balance sheet. 

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 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 or its ability to effectively safeguard sensitive taxpayer 
information. 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 are exhausted, it 
could have serious implications for our ability to determine whether 
IRS’s financial statements are fairly stated. 

IRS will need to fully address the remaining financial management 
issues caused by the limitations of its automated financial management 
systems. In formulating its strategy for dealing with these issues, IRS 
will need to address how it will 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 IFS that 
encompasses IRS’s cost accounting capability. IRS has completed several 
pilot projects intended to explore ways of addressing this issue. In 
1995, we designated financial management and systems modernization at 
IRS as high-risk areas.[Footnote 3] We continue to consider these 
issues as high risk and include them in our Business Systems 
Modernization high-risk area. [Footnote 4]. 

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.[Footnote 5] It 
is 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 6] 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 to improve enforcement and, ultimately, taxpayer compliance, is 
the need to have current and reliable information on the rate of 
compliance, both overall and by type of taxpayer. IRS is in the process 
of completing a new study of the rate of compliance with the nation’s 
tax laws by individual taxpayers for tax years 2006 and 2007, and is 
conducting a similar study of S-Corporations.[Footnote 7] IRS expects 
initial compliance rate estimates from the S-Corporation and tax year 
2006 individual reporting study during fiscal year 2009. Additionally, 
although IRS has made significant progress as discussed above, the 
continued lack of readily available cost benefit information for most 
programs and activities, will hamper IRS’s ability to make the most 
effective use of the information ultimately acquired from these studies 
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 Financial Services and General 
Government, Senate Committee on Appropriations; Subcommittee on Federal 
Financial Management, Government Information, Federal Services, and 
International Security, Senate Committee on Homeland Security and 
Governmental Affairs; House Committee on Appropriations; House 
Committee on Ways and Means; House Committee on Oversight and 
Government Reform; Subcommittee on Financial Services and General 
Government, House Committee on Appropriations; and Subcommittee on 
Government Management, Organization, and Procurement, 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 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]. 

If you have any questions concerning this report, please contact me at 
(202) 512-3406 or sebastians@gao.gov. 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: 

Steven J. Sebastian: 
Director: 
Financial Management and Assurance: 

[End of section] 

United States Government Accountability Office: 
Washington, DC 20548: 

To the 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 8] 
this report presents the results of our audits of the financial 
statements of the Internal Revenue Service (IRS) for fiscal years 2008 
and 2007. 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 9] nor do they 
include information on tax expenditures.[Footnote 10] 

Based on our audits, we found that: 

* IRS’s financial statements are presented fairly, in all material 
respects, in conformity with U.S. generally accepted accounting 
principles; 

* IRS’s internal controls were not effective as of September 30, 2008; 

* IRS did not comply with one of the legal provisions we tested, and; 

* 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, 2008. 

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, posing 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 2008 and 2007, IRS collected about $2.7 trillion in tax payments, 
processed hundreds of millions of tax and information returns; and paid 
about $426 billion and $292 billion, respectively, in refunds to 
taxpayers. 

One of the more significant challenges continuing to face IRS is the 
ability to routinely provide management the appropriate information it 
needs to make fully informed day-to-day decisions and ensure 
accountability, which is a primary objective of the CFO Act. During 
fiscal year 2008, 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 internal control weaknesses that we 
have reported in prior audits. In fiscal year 2008, for the ninth 
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 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 2008, IRS continued to make significant progress in 
its efforts to address long-standing weaknesses in control over several 
critical areas, including collections of unpaid taxes and disbursements 
of improper tax refunds, security over hard-copy taxpayer receipts and 
data, management of unpaid tax assessments, and reliability of 
financial reporting. 

For example, in past years, we have reported a material weakness 
[Footnote 11] in IRS’s internal control over tax revenue and refunds 
because IRS’s controls were not fully effective in providing management 
the essential information it needs to make informed decisions on how 
best to maximize the federal government’s ability to collect tax 
revenues owed and minimize the risk of paying improper tax refunds. We 
reported that IRS did not have agencywide cost-benefit information; 
related cost-based performance measures; or an agencywide, systematic 
approach to ensure it was maximizing the use of its tax collection 
resources. To address these issues, IRS has in recent years (1) made 
significant progress in cost accounting by developing a cost accounting 
policy that provides guidance on managerial cost concepts for the 
agency, establishing an Office of Cost Accounting within the Chief 
Financial Officer’s organization to implement IRS’s cost accounting 
policy throughout the agency, and completing several cost pilot 
projects to demonstrate the viability of its methodology for 
determining full cost at the program level, (2) further enhanced its 
performance measures and completed development of return on investment 
information for the Earned Income Tax Credit program that includes full 
costs, (3) established corporate governance bodies that collectively 
represent significant progress in establishing an agencywide approach 
to managing its tax collection efforts, and (4) improved its management 
of tax collection efforts by continuing to implement sophisticated 
computer analysis and modeling to prioritize and focus its collection 
activities. IRS’s progress in further addressing these issues during 
fiscal year 2008 has been such that we no longer consider the remaining 
internal control deficiencies to constitute a material weakness. 

However, the deficiencies that remain constitute a significant 
deficiency in internal control over revenue and refunds that continues 
to hamper IRS’s ability to optimize the use of its resources to collect 
unpaid taxes and minimize payment of improper refunds. IRS has not 
developed performance metrics or goals on the cost and benefits, 
including enforcement tax revenue collected from IRS’s enforcement 
programs and activities,[Footnote 12] and IRS has not established the 
financial management structures and processes to provide it with key 
financial management data on costs and enforcement revenue. Addressing 
these issues successfully is fundamental to IRS’s ability to determine 
how it will ultimately apply cost and enforcement revenue information 
to its various tax law enforcement functions, especially the collection 
of unpaid taxes. 

In addition, during our fiscal year 2008 audit, we found that IRS 
significantly improved its internal control to safeguard hard-copy 
taxpayer receipts and data processed at its primary submission 
processing locations–service center campuses and lockbox banks. 
[Footnote 13] For example, IRS (1) strictly enforced its prohibition 
against employees bringing personal belongings into restricted receipt 
processing areas and strengthened control to prevent unauthorized 
access to taxpayer receipts and information, (2) better enforced and 
revised its operating procedures for processing hard-copy taxpayer 
receipts and data, and (3) ensured that couriers transporting taxpayer 
deposits to depository institutions were on approved access lists and 
used appropriate vehicles. These improvements, combined with the 
progress we reported in previous audits, enabled us to conclude that 
remaining issues related to internal control over hard-copy taxpayer 
receipts and data no longer constitute a significant deficiency. 

However, although levels of electronic filing of returns have been 
steadily increasing, IRS nevertheless continues to receive and process 
millions of hard-copy tax returns each year, along with hundreds of 
billions of dollars of associated payments. As long as IRS continues to 
receive such large volumes of hard-copy taxpayer receipts and data, 
there will continue to be a significant risk to the government and 
taxpayers alike that loss of receipts or inappropriate disclosure of 
taxpayer information may occur during this process. Safeguarding these 
taxpayer receipts and associated taxpayer information to prevent such 
events are among IRS’s most important and demanding responsibilities, 
and congressional and taxpayer expectations in this regard are 
justifiably high. Thus, it is critical that IRS maintain effective 
internal control to mitigate this risk, including ongoing monitoring of 
those internal controls to verify that they do not deteriorate over 
time. 

During fiscal year 2008, IRS continued to enhance the capabilities of 
its Custodial Detail Data Base (CDDB), which is ultimately intended to 
serve as a subsidiary ledger for IRS’s tax administration activities, 
including tax revenue receipts, tax refund disbursements, and unpaid 
tax debt. An effective detailed subsidiary ledger is an important tool 
to help insure that reported balances are accurate, complete, and 
supported by underlying detailed records. IRS plans to achieve this 
goal through CDDB by analyzing and linking account information in IRS’s 
master files[Footnote 14] to its general ledger for tax administration 
activities. In fiscal year 2008, IRS enhanced CDDB to begin regularly 
recording unpaid assessments, including accrued penalties and interest, 
from its master files to its general ledger by the various financial 
reporting categories (taxes receivable, compliance assessments, and 
write-offs).[Footnote 15] These enhancements established CDDB’s 
capability to function as a subsidiary ledger for unpaid tax debt. 
However, due to inherent limitations in CDDB programs for classifying 
unpaid assessments into the correct financial reporting categories and 
inaccuracies in taxpayer records, IRS is still unable to use CDDB as 
its subsidiary ledger for external reporting of its unpaid assessments, 
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. For example, IRS had to make over $28 billion in 
adjustments to the fiscal year-end 2008 gross taxes receivable balance 
produced by CDDB as a result of its manual estimation process for 
financial reporting. Full operational capability of CDDB depends on the 
successful implementation of future system releases planned through 
2009 and the ability of these releases to address current limitations 
in accurately classifying all of IRS’s unpaid assessments. 

In addition, IRS devoted significant resources to addressing the lack 
of adequate audit trails we reported in prior years for its most 
material tax-related balances, including tax revenue, tax refunds, and 
taxes receivable. To address this issue, during fiscal year 2008, IRS 
instituted the use of trace identification numbers (trace ID) for 
revenue and refund transactions in order to provide this traceability 
from its general ledger for tax transactions back to source 
documentation and throughout IRS’s financial management system. For tax 
refunds, as well as for tax revenue transactions processed through the 
Electronic Federal Tax Payment System (EFTPS),[Footnote 16] we were 
able to verify that these trace IDs were effective in providing 
transaction traceability. However, we also found that for tax revenue 
transactions processed outside of EFTPS, the transactions required 
manual transcription of the trace IDs by IRS employees for input to the 
general ledger, which entailed a significant inherent risk of human 
error. As of September 30, 2008, IRS had not instituted controls to 
prevent or detect and correct such transcription and input errors. In 
addition, as noted above, IRS’s reported balance for federal taxes 
receivable on its balance sheet was based on statistical sampling and 
thus was not recorded in the general ledger. As a result, IRS’s general 
ledger for tax transactions continues to lack traceability for material 
tax transactions reported in its financial statements. 

During fiscal year 2008, IRS continued to expand its processing 
capabilities of individual tax returns through its Customer Account 
Data Engine (CADE), the system IRS is implementing to replace its 
master files. Two updates to CADE released in January and July 2008 
added several new tax forms and schedules to its functionality. 
However, longer term challenges to CADE’s success remain, including the 
ability to access historical taxpayer account information currently 
residing on the master files, as well as the ability to handle 
processing capacity and data storage requirements to meet future 
operational needs. During fiscal year 2008, CADE processed 30.6 million 
tax returns, including 29 million returns that generated tax refunds 
totaling $62.3 billion, of which $18.2 billion were disbursed under the 
Economic Stimulus Act of 2008.[Footnote 17] However, for fiscal year 
2008, this still represented only about 15 percent of the total refunds 
disbursed, and CADE did not process any of the over $2.7 trillion in 
tax revenue IRS collected. It is unclear when IRS will be able to rely 
on CADE to process all tax collections and related tax refunds. 

While IRS has made notable improvements throughout fiscal year 2008, 
control deficiencies over financial reporting and management of unpaid 
tax assessments continued to represent material weaknesses. 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 use 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 weakness before these options disappear, 
it could have serious implications for our ability to determine whether 
IRS’s financial statements are fairly stated. 

In addition, as IRS continues to implement the modernization of its 
computer-based administrative processes, care is needed to ensure that 
paperless transactions using electronic signatures are appropriately 
implemented. As part of the Office of Management and Budget’s (OMB) 
implementation of the Government Paperwork Elimination Act, OMB has 
issued procedures and guidance cautioning agencies to carefully control 
access to electronic data associated with paperless transactions. 
[Footnote 18] 

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, 
2008, and September 30, 2007. 

However, misstatements may nevertheless occur in other financial 
information reported by IRS and not be detected 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, which 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, are not reported in the financial statements but rather are 
presented as other accompanying information. 

Opinion on Internal Control: 

Because of the material weaknesses in internal control discussed below, 
IRS did not maintain effective internal control 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 OMB Circular No. A-123, Management’s 
Responsibility for Internal Control. 

Despite its material weaknesses in internal control and its systems 
deficiencies, IRS was able to prepare financial statements that were 
fairly stated in all material respects for fiscal years 2008 and 2007. 
Nonetheless, IRS continues to face the following key issues that 
represent material weaknesses in internal control: 

* weaknesses in controls over the financial reporting process, 
resulting in IRS not (1) being able to prepare its balance sheet 
without extensive compensating procedures and (2) having current and 
reliable ongoing cost 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; 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 control 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 
budget 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 
2008 FIA assurance statement to the Department of the 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. This deficiency 
entails weaknesses in IRS’s control over tax revenue and refunds. IRS’s 
controls were not fully effective in providing IRS management 
information to assist it in making more informed decisions on how best 
to maximize the federal government’s ability to collect tax revenues 
owed and minimize the risk of paying improper tax refunds. IRS 
encompassed the issues comprising this significant deficiency in its 
fiscal year 2008 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 19] One hundred and forty-seven 
recommendations were still open as of the date of this report, of which 
66 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. 

We also identified less significant weaknesses in IRS’s system of 
internal control and its operations. We will be reporting on these 
matters to IRS separately. 

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 20] 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, 2008. [Footnote 21] 
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 22] (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 23] 

The issues resulting in IRS’s lack of substantial compliance with the 
requirements of FFMIA relate to the material weaknesses discussed 
above, and were reflected in the material weaknesses reported in IRS’s 
fiscal year 2008 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 other 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. On the basis of 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 control 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 year ended September 30, 2008. We 
considered the material weaknesses identified above in determining the 
nature, timing, and extent of our audit procedures on IRS’s fiscal 
years 2008 and 2007 financial statements. 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 stated that it was dedicated to 
improving financial management, and noted its significant 
accomplishments in addressing related challenges, including (1) 
completing required Federal Information Security Management Act 
activities, including contingency plan testing on 247 applications and 
systems and live disaster recovery tests for all major applications, 
(2) achieving a 35 percent reduction in Trust Fund Recovery Penalty 
cross reference errors using CDDB reports, and classifying $27 billion 
(77 percent) of the $35 billion in TFRP inventory, and (3) implementing 
a 20 digit trace-ID in all payment systems which enables CDDB to 
identify each individual tax revenue payment to support traceability to 
IRACS. 

IRS also recognized that information security continues to be a 
significant issue, and noted that it established an Office of Online 
Fraud Detection and Prevention to address evolving online threats 
affecting IRS and taxpayers. IRS also noted that it developed a 
corrective action plan to address information technology security 
training, systems auditing, access controls, system security 
configuration control, and systems disaster recovery. Additionally, IRS 
noted that it is continuing its assessments of business processes to 
address identity protection and that it analyzed the use of social 
security numbers for reduction and elimination where possible. 

Finally, IRS recognized that challenges remain, but noted that it has a 
solid management team that is dedicated to promoting the highest 
standards of financial management, and continues to increase the focus 
on information security and internal control while improving financial 
reporting. 

The complete text of IRS’s response is included in appendix III. 

Signed by: 

Steven J. Sebastian: 
Director: 
Financial Management and Assurance: 

November 5, 2008: 

Management Discussion and Analysis: 

The Internal Revenue Service: 
FY 2008 Management Discussion and Analysis At A Glance: 

"Taxes are the price we pay for living in a civilized society:" 
US Supreme Court Justice Oliver Wendell Holmes. 

Douglas Shulman became the 47th Commissioner of Internal Revenue on 
March 24, 2008. He presides over the nation's tax administration 
system. which annually collects approximately $2.74 trillion in tax 
revenue that funds most 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 Defence 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's name was changed to the Internal 
Revenue Service (IRS). 

Vision: 

The IRS will fund America's future by strengthening our system of 
voluntary tax compliance. 

Organization: 

The IRS organizational structure (Appendix A) closely resembles the 
private sector model of organizing around customers with similar needs. 
The scope of IRS operations includes collection of individual and 
business related taxes, examination of returns, taxpayer assistance, as 
well as oversight of the tax-exempt organization and the Earned Income 
Tax Credit program, one of the nations largest federally administered 
means-tested benefits programs. 

Operating Divisions: 

* Wage and Investment: 
* Small Business and Self-Employed: 
* Large and Mid-Size Business: 
* Tax-Exempt and Government Entities: 

Employees: 

The IRS employs over 100.000 employees. 

Location: 

The IRS is headquartered in Washington, DC. The IRS also has employees 
located at over 700 offices in all states and territories and some U.S. 
embassies and consulates. 

IRS FY 2005 Statistics: 

Total Revenue Collected: 52.74 trillion; 
Total Enforcement Revenue Collected: $56.4 billion; 
Total Refunds: $426 billion; 
Economic Stimulus Payments Facts: 
- Number of Payments Issued: 116.2 million; 
- Total Payments: $94.3 billion; 
- Number of Assistor Calls Answered: 5.5 million; 
- Number of Automated Calls Answered: 21.9 million; 
- Where's My Stimulus Payment?" Usage: 38.7 million; 
Number of Hits on IRS.gov: 2.2 billion; 
Number of Returns Filed: 249.8 million; 
"Where's My Refund?' Usage: 39.2 million; 
Number of Taxpayers Assisted: 99.3 million; 
Number of Returns Filed Electronically:	98.8 million. 

Financial Resources: 

The IRS FY 2008 budget was $10.9 billion in direct appropriations, 
supplemented by $196.1 million in user fee revenue and $140.2 million 
in reimbursable resources for a total operating level of $11.2 billion. 
The IRS also received $202 million in FY 2008 supplemental funding to 
execute the Economic Stimulus Program. 

Internet: 

The IRS provides tax information, taxpayer services, forms. and 
publications at [hyperlink, http://www.irs.gov]. 

IRS: 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 Appropriations: 
Enforcement: 43%; 
Operations Support: 33%; 
Taxpayer Services: 20%; 
Business Systems Modernization: 2%; 
Health and Tax Credit Administration: 0%; 
Other: 2%. 

Funding by Appropriations ($ thousands): 

In FY 2000, the three core operating appropriations were allocated as 
shown below: 

* Taxpayer Services: [$2,140,365] Funds processing tax returns and 
related documents, assistance for taxpayers in filing returns and 
paying taxes due. 

* Enforcement: [$4,780,000] Funds examination or 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: [$3,689,694] 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. 

In addition to the core appropriations, the IRS has the following 
appropriations: 

* Business Systems Modernization: [$267,090] Funds capital asset 
acquisitions of information technology systems to modernize key tax 
administration systems. 

* Health Insurance Tax Credit Administration: [$15,235] Funds the 
administration of the Health Coverage Tax Credit (HCTC). 

* Other; Mandatory Appropriation Special Funds): User Fees: [$196,145] 
Financed by payment for goods and services provided and Private 
Collection Agency [$13,428] collection fees. 

How IRS Uses its Resources: 

Compliance Services: 65%; 
Filing and Account Services: 25%; 
Taxpayer Assistance and Education: 9%; 
Administration of Tax Credit Program: 1%. 

The Statement of Net1 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 activities include taxpayer 
education and outreach, tax publication issuance and distribution. 

* Filing and Account Services activities include filing tax returns, 
maintaining customer accounts, and processing taxpayer information. 

* Compliance Services activities include pre-filing agreements, 
document matching, examination, collection, and criminal investigation 
activities. 

* Administration of Tax Credit Programs includes costs for EITC and 
HCTC program activities. 

The following table shows comparative data on the use of IRS resources 
by major programs: 

Program: Taxpayer Assistance and Education; 
FY 2008: $622,852; 
FY 2007: $478,663. 

Program: Filing and Account Services; 
FY 2008: $3,601,581; 
FY 2007: $3,640,565. 

Program: Compliance Services; 
FY 2008: $8,138,484; 
FY 2007: $7,701,812. 

Program: Administration of Tax Credit Programs; 
FY 2008: $184,344; 
FY 2007: $190,881. 

[End of table] 

2009-2013 Strategic Plan Update: 

In FY 2008, the IRS updated it's Strategic Plan lo identify the goals 
and objectives to guide the agency from FY 2009 through FY 2013. The 
plan incorporates key trends shaping tax administration including 
increasing international activities, and continuing to focus on the 
goals of improving taxpayer service and enforcing the tax laws. The 
goals are supported by a strategic foundation that includes the 
critical areas of human capital management and information technology. 
The new strategic plan will guide the agency in its mission to provide 
America's taxpayers top-quality services by helping them understand and 
meet their tax responsibilities and enforce the law and with integrity 
and fairness to all. 

The Tax Gap: 

The gross tax gap is the difference between the total tax imposed on 
taxpayers by law for a given year and the amount of that tax liability 
that is paid on time. The IRS estimates the gross tax gap is $345 
billion for 2001. The net tax gap is as follows: 

Net Tax Gap: $290 billion; 
- Gross Tax Gap: $345 billion; 
- Enforced and Other Late Payments: $55 billion. 

The components of the gross tax gap are: 
Underreporting: 82%; 
Underpayment: 10%; 
Nonfiling: 8%. 

The IRS remains committed to finding ways to increase compliance and 
reduce the tax gap, while minimizing the burden on the vast majority of 
taxpayers who pay their taxes accurately and on time. 

Fiscal Year (FY) 2008 Performance: 

Fur FY 2008, the IRS achieved an overall success rate of 75% in meeting 
or exceeding the targets for 24 of is 32 performance measures. This is 
an improvement over the 62% success rate achieved in FY 2007. In FY 
2008, 67% of the Taxpayer Service targets (8 of 12), 78% (14 of 16) of 
the Enforcement targets and 100% (2 of 2) of its Business System 
Modernization targets were achieved. Detailed information on 
performance is contained in Appendix B, Performance Data; and Appendix 
C, Explanation of Shortfalls. 

Collections related to enforcement activities totaled $56.4 billion, a 
65% increase over FY 2002. 

IRS Enforcement Revenue (in Billions): 
FY 2002: $34.1; 
FY 2003: $37.0; 
FY 2004: $43.1; 
FY 2005: $47.3; 
FY 2006: $48.7; 
FY 2007: $59.2; 
FY 2008: $56.4. 

In FY 2008, the IRS expanded Its ongoing research studies of filing, 
payment and reporting compliance, including the National Research 
Program to provide a comprehensive picture or overall taxpayer 
compliance levels. Research allows the IRS to target specific areas of 
noncompliance to improve voluntary compliance and allocate resources 
more effectively to reduce the tax gap. Improved research data also 
refine the workload selection models to reduce audits of compliant 
taxpayers and ultimately help the IRS achieve high rates of return from 
its enforcement programs. The reporting compliance study for individual 
taxpayers that will provide updated and more accurate audit selection 
tools was launched in 2007 and continued in 2008. It is the first of an 
ongoing series or individual studies using a multi-year rolling 
methodology. The study examined more than 13,000 randomly selected tax 
year 2006 individual audits. Similar sample sizes will he used in 
subsequent tax years. This new method will allow the IRS to combine 
results over rolling three-year periods to make annual updates to its 
voluntary compliance estimates after the initial three annual studies. 

As part of its continuing effort to measure the burden associated with
meeting Federal tax obligations, the IRS surveyed both individual and
self-employed taxpayers to measure time and expense in meeting filing
requirements for small-business taxpayers who file both income and
employment tax returns. Results of the surveys will be used to develop
updated burden estimate models for release in FY 2009. 

[End of section] 

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: 

The IRS continued to improve services through automation, outreach, and 
education of taxpayers. In FY 2008, taxpayers used the IRS website, 
[hyperlink, http://IRS.gov], in record numbers to get current 
information. Changes to the Alternative Minimum Tax (AMT) provisions 
and passage of the Economic Stimulus Act of 2008 required the IRS to 
develop new web applications, including Economic Stimulus Payment 
calculators and “Where’s My Stimulus Payment?,” to provide timely 
information to taxpayers. IRS.gov usage increased significantly in FY 
2008 from FY 2007: 

* Nearly 2.2 billion web pages were viewed, an increase of 63%; 

* More than 39.2 million taxpayers used “Where’s My Refund?,” an 
increase of 22% and over 317,000 used the new Spanish version; 

* Over 38.7 million taxpayers used “Where’s My Stimulus Payment?” to
check on the status of their payment; 

* Released tax publications in more languages, including Chinese, 
Russian, Korean, and Vietnamese; 

* Implemented an automated message to inform taxpayers about the 
estimated wait time to reach a telephone assistor; 

* Launched an electronic Publication 17, Your Federal Income Tax, on 
IRS.gov; and; 

* Implemented “My IRS Account,” a self-service internet application 
that allows taxpayers access to information about their past filings. 

Improve Taxpayer Service: 

Helping taxpayers understand their tax reporting and payment 
obligations is the cornerstone of taxpayer compliance. In FY 2008, the
IRS met or exceeded 67% (8 of 12) of the Taxpayer Service
performance targets. 

In FY 2008, the IRS continued to improve taxpayer service, including
efforts to increase the number of taxpayers using electronic filing. New
forms and schedules were added to the business electronic portfolio; the
number and use of volunteers to assist taxpayers in meeting filing
requirements increased; communication with external stakeholder
organizations improved with the introduction of feedback loops; and, the
IRS continued to conduct national phone forums with practitioners to
discuss important tax issues affecting taxpayer groups. 

Highlights of the 2008 Filing Season: 

The 2008 filing season was challenging because of late enactment of
the AMT legislation and implementation of the Economic Stimulus
Payment program. Despite these challenges, the IRS delivered another
successful filing season. Results of the 2008 filing season include: 

* Processed 155.6 million individual returns including returns filed 
solely to claim an economic stimulus payment, an increase of 11% and
issued 107.6 million refunds totaling $369 billion; 

* Answered over 40.4 million calls, an increase of 21% because of a
large number of taxpayer inquiries about the economic stimulus
checks; 

* Completed 52 million automated calls, an increase of over 123%; 

* Maintained Account and Tax Law Accuracy rates of over 90%; 

* Expanded partnerships with nonprofit and community organizations,
opening approximately 12,000 free tax preparation sites nationwide.
Volunteers at these sites prepared 3.5 million returns for low-income
and elderly taxpayers, an increase of 33%; and; 

* Expanded return preparation at the IRS Taxpayer Assistance Centers
preparing over 575,000 returns, a 42% increase over last year. 

Increased electronic filing over 2007: 

* Individual returns electronically filed surpassed 63% (excluding
taxpayers who filed solely to claim a stimulus payment); 

* Total number of individual returns filed electronically reached 89.6
million, up 12%; 

* Business returns electronically filed reached 19.4%; 

* Home-computer filing increased to 26.8 million returns, a 20%
increase over 2007; and; 

* Tax professional use of e-file increased to 61.8 million returns, an
increase of 8% over last year. 

Over 4.7 million tax returns were prepared and submitted through the
IRS Free File in FY 2008, a 23% increase over FY 2007. Free file
continues to be a popular option for taxpayers who qualify. A recent
survey showed 96% of those who used the program found it "easy to use;" 
98% said they would recommend Free File to a friend or family member; 
and 95% said they would use it again. 

Economic Stimulus Payment (ESP): 

In January 2008, the Economic Stimulus Act of 2008 provided economic 
stimulus payments to over 130 million American households. Taxpayers 
were entitled to payment of up to $600 ($1,200 if filing a joint 
return) plus an additional $300 for each qualifying child. The IRS sent 
notices to 132.9 million taxpayers to alert them of their potential 
eligibility and generated publicity to ensure stimulus payments reached 
the widest possible audience. The IRS implemented ESP soon after its
enactment in February 2008, allowing Treasury to begin depositing 
payments in taxpayer bank accounts and mailing checks to taxpayers 
beginning 55 workdays after passage of the legislation. 

Taxpayers filed a 2007 tax return to claim the payment, and the IRS 
used that information to determine eligibility and calculate the amount 
of the stimulus payment. 

To ensure taxpayers understood the legislation and received their 
payments as quickly as possible, the IRS: 

* Developed announcements, self-service telephone and web applications, 
and a stimulus telephone hotline taxpayers could use to ascertain the 
status of their payment; and; 

* Launched an information center on IRS.gov dedicated to the stimulus
payments that included features such as a frequently asked questions 
section, a stimulus payment calculator, and a “Where’s My Stimulus 
Payment?” application. 

To reach those taxpayers who did not have a filing requirement, the IRS 
mailed over 25.6 million information packages to inform social security 
recipients and disabled veterans about the payments. 

On March 29, 2008 the IRS held “Super Saturday,” a day devoted to 
getting the word out about the program and assisting people in filing 
for the stimulus payment. Super Saturday successes include: 

* Assisted over 22,600 taxpayers; 

* Prepared more than 11,000 returns, including over 8,900 returns 
solely to claim a stimulus payment; 

* Answered 24,000 telephone calls. 

Taxpayer Education and Outreach: 

The IRS enhanced its outreach and educational services through
partnerships with the public to increase understanding and compliance
with the tax law. Free tax seminars were offered to groups of people
sharing common tax interests. 

The IRS partners with organizations such as state taxing authorities and
volunteer groups to serve taxpayer needs. Through its 4,991 Volunteer
Income Tax Assistance and 6,849 Tax Counseling for the Elderly sites,
the IRS provided free tax assistance to the elderly, disabled, and 
limited English proficient individuals and families. The over 78,000 
volunteers located at these sites filed over 3.5 million returns, a 33% 
increase over FY 2007. 

The IRS also reached out to those taxpayers eligible for the Earned
Income Tax Credit (EITC), implementing a vigorous multi-dimensional
outreach strategy that included: 

* Creating EITC products and services designed to target underserved
groups such as rural taxpayers, childless workers, and the limited
English proficient filers; 

* Conducting a second EITC Awareness Day that generated extensive
national and local media coverage designed to expand education of
the public on EITC and increase the participation of eligible taxpayers;
and; 

* Increasing free EITC return preparation by 25%. As a result,
electronic filing of EITC returns increased by almost 18% over 2007.
The IRS launched its new Facilitated Self-Assistance Research Project
(FSRP) in FY 2008. The project allows taxpayers to access IRS.gov at
Taxpayer Assistance Centers. Approximately 2,401 customers used
FSRP at the 15 pilot sites. An additional 35 sites will be launched 
during FY 2009. 

Through its Low Income Taxpayer Clinic (LITC) grant program, the IRS
awarded matching grants of up to $100,000 per year to develop, expand
or maintain low income taxpayer clinics. In FY 2008, the IRS awarded
almost $9 million LITC grants to over 150 organizations in 50 states, 
the District of Columbia, Puerto Rico, and Guam. 

Taxpayer Burden Reduction: 

Throughout FY 2008, the IRS pursued initiatives to reduce taxpayer
burden, the time and out-of-pocket expense taxpayers incur in meeting
their tax responsibilities. The IRS continued its partnerships with
external stakeholders including practitioners, citizen groups, software 
developers, and state/federal agencies to solicit suggestions to reduce
taxpayer burden and to design forms more suitable for computer usage.
In FY 2008, the IRS: 

* Improved IRS.gov to help taxpayers find answers to tax questions
quickly and, prepare returns accurately and on time. Also, the first
version of “My IRS Account” was implemented, a self-service
application that provides taxpayers access to their past filings. 

* Provided a more efficient process to permit taxpayers to file Form
1120S, U.S. Income Tax Return for an S Corporation, and Form 2553,
S Corporation Election, simultaneously. The change reduces corporate
taxpayer burden by allowing the IRS to process completed tax returns
and corresponding elections without delays or additional contacts. 

* Launched Form 990-N, Electronic Notice for Tax-Exempt Organizations
Not Required to File Form 990 or 990-Z (E-Postcard), for small tax-
exempt organizations to electronically file an annual information 
notice. Approximately 170,000 e-Postcards were filed in FY 2008. 

* Redesigned Form 990, Return of Organization Exempt from Income Tax, 
the annual return required to be filed by tax-exempt organizations to 
report information about their operations. The redesigned form (the
first redesign in 25 years) enhances transparency, promotes compliance, 
and minimizes taxpayer burden. 

* Redesigned Form 8857, Request for Innocent Spouse Relief. The
revised form is easier for taxpayers to complete and speeds IRS
processing, easing the burden for taxpayers and reducing government
costs. 

Alternative Minimum Tax (AMT): 

The AMT “patch” was signed into law late in December 2007. For the vast 
majority of taxpayers, the FY 2008 filing season began on-time. The AMT 
and AMT-related tax calculations affected several major tax processing 
systems which required update. The IRS performed the necessary updates 
and processed a majority of returns, including many AMT-affected 
returns, without any processing delays. 

To lessen the impact of the late legislation, the IRS and the return 
preparer industry developed a communication and outreach strategy to 
alert taxpayers to the AMT law changes and the effect on filing 
requirements and processing. Approximately 13.5 million AMT taxpayers 
began filing on February 11, 2008. 

[End of section] 

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: 

* In FY 2008, the IRS collected $2.74 trillion in revenue, including 
$56.4 billion collected through examination and collection enforcement 
activities. 

* From FY 2002 to FY 2008, the IRS increased revenue from its 
enforcement programs 65%, yielding a 5 to 1 return on investment in 2008
based on the $56.4 billion in enforcement revenue with a budget of
$10.9 billion. 

* In FY 2008, the IRS continued to place greater emphasis on 
examination of returns for flowthrough entities, partnerships and S
Corporations, and an increased focus on examining the returns of large
corporations – those with assets greater than $250 million. 

Operation Malicious Mortgage highlights the partnership between the IRS 
and the Department of Justice to combat the threat mortgage fraud poses
to the housing industry and worldwide credit markets. In FY 2008, 144 
mortgage fraud cases were investigated, and 406 defendants were charged 
with fraud. An estimated $1 billion in losses across the nation were 
attributed to the charged individuals. 

Backdated Stock Options: 

The IRS made significant progress in resolving Backdated Stock Options 
issues. Backdating stock options is a tax avoidance strategy to reduce 
tax liabilities from the higher income tax rate of 35% to the lower
capital gains rate of 15%. 

The practice of backdating stock options received high-level 
Congressional interest and nationwide coverage since changes in the law 
reduced the reporting requirement from 45 days to 2 days to minimize 
future occurrences of the practice. 

The IRS collaborated with the Securities and Exchange Commission to 
identify corporations with potential backdating, generating sizable tax 
and penalty assessments. The IRS launched an initiative in 2008 to 
allow employers to voluntarily pay taxes and interest for their 
employees who exercised certain discounted stock options and stock 
appreciation in 2006. The initiative generated more than $1.65 billion 
in tax and penalty assessments and closure of 1,329 return 
examinations. 

Increasing International Tax Activities: 

The number and complexity of international tax issues is increasing 
dramatically each year. Actions taken in FY 2008 include: 

* Improved alignment of resources to address international challenges; 

* Issued guidance to address offshore and cross-border compliance risks 
and expanded relationships and collaboration with foreign tax 
administrators; 

* Expanded the Joint International Tax Shelter Information Centre 
(JITSIC) with the addition of the Japanese National Agency and opened a 
second office in London. The JITSIC was created by the IRS and the tax 
agencies of the United Kingdom, Canada, and Australia to identify and 
curb cross-border abusive transactions and schemes; and; 

* In conjunction with the Department of State, reached agreement to 
open an office at the U.S. Embassy in Beijing. The post will open in 
early FY 2009. 

Abusive Tax Avoidance Transactions: 

Abusive tax avoidance transactions can appear on many types of tax 
returns and range from complex structured corporate transactions that 
utilize multiple entities to individual scams and schemes. Use of 
offshore entities and accounts is also common and organized promotion 
of tax shelters makes them available to all types of taxpayers. The 
variety, size and nature of tax shelters require an organized approach
to detection, deterrence and enforcement so that the use of abusive 
transactions can be stopped. 

Lease-In/Lease-Out, Sale-in/Sale-Out Settlement Initiative: 

As part of the effort to detect and deter aggressive tax shelters, the 
IRS launched a settlement initiative for both Lease-In/Lease-Out (LILO) 
and Sale-In/Lease-Out (SILO) transactions in FY 2008. 

SILO and LILO transactions involve corporations leasing or purchasing 
large assets such as rail systems, sewer systems and other large 
infrastructure, mostly overseas, and re-leasing them to their original 
owners or operators. 

* Corporations, many of which are in the Fortune 500 and include many 
of the nation’s top banks, use these transactions to bolster their 
balance sheets, gaining millions of dollars in tax deferrals. 

* The IRS entered into a settlement offer to shut down transactions IRS 
has long considered abusive, offering taxpayers up to 60 days to accept 
the terms: 
- Companies who agree to use best efforts to shut down these shelters by
2010 will be allowed to keep 20% of the deductions claimed through 
2007. 

The potential for additional tax revenue resulting from the settlements 
lies in the recovery of billions of dollars in tax deferrals. 

Enhance Enforcement of the Tax Law: 

Enforcement of the tax laws is an integral component of the IRS effort 
to enhance voluntary compliance. IRS enforcement activities, such as
examination and collection, target elements of the tax gap and remained
a high priority in FY 2008. In FY 2008, the IRS initiated additional
information reporting requirements for large partnerships and foreign
corporations, soft notices, and self-correction to improve compliance. 

Highlights of Enforcement Performance: 

The IRS showed consistent improvement in its enforcement results,
meeting or exceeding 78% (14 of 18) of its program targets. 

The improvements in enforcement performance resulted primarily from
the focus on corrosive activities of corporations, high income 
taxpayers, and other major violators of the tax code. Targeting these 
high-risk categories improves IRS efficiency, reduces the burden on 
compliant taxpayers, and focuses enforcement presence where it is most 
needed. 

In FY 2008, the IRS enhanced analytics in critical programs, improved
workload identification and selection methods, and implemented systems
that target high-risk cases. As a result, in FY 2008 the IRS made
improvements over FY 2007 in the following key program areas: 

* Increased high-income taxpayer audits almost 16%; 

* Increased small business audits 3%; 

* Audited over 13,000 large corporations for the fourth consecutive 
year, a significant achievement given the size (assets greater than $10
million) and complexity of the corporate entities; 

* Increased collection case closures 1.4%; 

* Increased tax-exempt and government entities compliance contacts
6%; and; 

* Increased automated underreporter (AUR) contact closures by almost 4% 
and dollars collected through AUR and information return processing by 
22%. 

The IRS also continued reengineering the examination and collection 
processes to expand coverage, reduce processing time, and increase 
yield. The IRS implemented technological enhancements to legacy systems 
to augment productivity and efficiency gains. Significant improvements 
made in FY 2008 include: 

* Expansion of the Reasonable Cause Assistant (RCA) for collection 
field employees to improve the accuracy and consistency of penalty- 
relief determinations for individual and business taxpayers. RCA
expedites the reasonable cause determination process by creating an
automated request and approval process. 

* Upgraded the Issue Management System (IMS) to provide a central 
repository for issue identification and tracking and allows data 
collection that can be used to develop and evaluate performance 
measures. The upgrade supported more than 5,000 revenue agents. 

* Productivity increases in the AUR notice process produced a 26% 
increase in assessments from $5.1 billion to $6.4 billion, and a 21%
increase in assessment dollars per case compared to last year. 

* Enhanced the identification and predictability of productive 
assessments in the Correspondence Examination Program (CEP) that 
contributed to a 41% increase in assessments to $2.6 billion. 

* Automated the Questionable Refund Program (QRP) processes, producing 
a 16% labor savings through centralization, reducing the 10 Fraud 
Detection Centers to three centers. FY 2008 QRP performance 
accomplishments include: 
- Identification of more than 337,000 potentially fraudulent returns
claiming more than $1.7 billion in total refunds; 
- Stopping more than $1.5 billion in fraudulent claims with an
average refund of $5,303; and; 
- Initiating 230 QRP investigations. 

* Implemented an Industry Issue Focus (IIF) process that places 
compliance issues into three tiers based on strategic impact and
importance to respond to changes in business practices that create
compliance risks resulting in $6.7 billion in additional taxable income
not previously reported; for Top Tier issue cases currently under
examination, there is potential for an additional $4.6 billion in
unreported taxable income. 

Questionable employment tax practices are employment schemes which have 
no basis other than to evade state or federal employment or 
unemployment taxes. The Questionable Employment Tax Program (QETP) is a 
collaborative program with the U.S. Department of Labor, the National 
Association of State Work Force Agencies, the Federation of Tax 
Administrators, and state agencies. In its first full year of 
implementation, QETP has an agreed case rate of 65%, where the taxpayer 
agrees to treat the worker as an employee, taking responsibility for 
applicable taxes (FICA and FUTA). Through FY 2008, the IRS has secured 
memorandums-of-understanding to conduct data sharing with 32 states. 

The IRS continued to vigorously investigate egregious tax, money 
laundering, and other financial crimes that adversely affect tax 
administration. Improved case development and selection methods, 
coupled with heightened fraud awareness resulted in successful 
prosecution of taxpayers involved in significant abusive tax schemes,
high-income non-filer, employment tax evasion cases, and other flagrant
forms of tax evasion. Using its unique statutory jurisdiction and 
financial expertise, the IRS made significant contributions to 
important national law enforcement priorities. Performance levels for 
the criminal investigation program remained high in FY 2008: 

* Completed 4,044 criminal investigations; 

* Achieved a conviction rate of 92.3%; 
* Maintained a Department of Justice acceptance rate of 93.6%, with a
U.S Attorney acceptance rate of 89.2%, which compares favorably with 
other Federal Law enforcement agencies; and; 

* Obtained 2,144 convictions, exceeding the FY 2008 target. 

The IRS also faced ongoing challenges in assisting tax-exempt and
government entities comply with the complicated rules for maintaining
their special tax status. The IRS continues to ensure that charitable
organizations are not used for non-charitable or illegal purposes,
including financing terrorist activities. In FY 2008, the IRS helped 
meet the special needs of pension plans, exempt organizations, and
government entities in complying with the tax laws, taking the following
actions: 

* Launched an e-Postcard (Form 990N) for small tax-exempt organizations 
to electronically file an annual information notice and redesigned the 
form used by tax-exempt entities to report information about their 
operations; 

* Developed a pre-screening process to identify employee plan
applications that have deficiencies so the taxpayer can fix items
timely; and; 

* Increased small employer awareness of Pension Plan Correction 
Programs via new fix-it guides and an educational workshop. 

[End of section] 

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. 

Of the major BSM project releases, 92% were within cost and 92% were 
within acceptable variance of project schedule milestones (+/- 10%) 
goals. 

Modernization Facts: 

* The IRS handles billions of transactions, processes more than 249.8 
million tax returns and over 1.8 billion information returns, collects 
$2.74 trillion in revenue and makes over 200 million customer contacts 
per year. 

Operation Review, Encrypt, and Decide (R.E.D.) 

In FY 2008, the IRS conducted Operation R.E.D. to focus employee 
awareness on existing policies and procedures regarding safeguarding of 
sensitive information. During this event, employees were given time to: 

* Review their electronic files and paper holdings for sensitive 
information that is required to be secured; 

* Encrypt (electronic) and/or safeguard (paper) all sensitive 
information that is required to be secured; and; 

* Decide whether information that they no longer have a need to know 
should be archived or destroyed. 

Figure: Operation R.E.D. 

Review: your possessions for PII; 
Encrypt or Safeguard: PII you have a continued need to keep in your 
possession; 
Decide: to archive or properly destroy PII you no longer need in your 
possession. 

(PII is Personally Identifiable Information). 

[End of figure] 

Employee Engagement: 

Employee engagement is the degree of employee motivation, commitment, 
and involvement in the mission of the organization. The IRS considers 
employee engagement fundamental to the overall success of the 
organization and believes that employee engagement is an ongoing 
process. 

The IRS conducts an annual survey to assess the level of engagement of
employees. Overall satisfaction showed steady improvement from a score 
of 3.48 in 2002 to a score of 3.79 in 2008, on a scale of 1 to 5, with 
5 being the most satisfied. 

Survey results showed: 

* Cooperation among people in the workgroup. 

* Recognition of the importance of the work. 

* Good relationships between employees and supervisors. 

IRS job satisfaction is higher than most other Federal agencies 
according to the Office of Personnel Management’s Federal Human Capital 
Survey. 

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 OMB 
Circular A-123. 

In FY 2008, the IRS conducted the following A-123 activities: 

* Streamlined the testing process without compromising the validity of 
A-123 reviews by implementing a 3-year Rotational Testing Schedule for 
transactions determined to be low risk. High risk and/or material 
transactions are tested annually. 

* Tested 17 transaction processes material to Treasury’s Consolidated
Financial Statements compared to 35 tests conducted in FY 2007.
- 12 administrative processes related to $10 billion in administrative
transactions. 
- 5 custodial tax-related processes related to $2.74 trillion in tax
revenues. 

Based upon the results of the evaluation, the IRS provided qualified 
assurance that its internal controls were operating effectively. 

The qualified assurance was based on the three material weaknesses, 
reported by GAO in its audit of the IRS FY 2008 and 2007 financial 
statements. 

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 Computer Security Material Weakness: 

Action: Certification and Testing of Systems; 
Status: 100%. 

Action: Systems Accreditation; 
Status: 98%. 

Action: Specialized training; 
Status: 99% of Employees. 

Action: Annual Awareness Training; 
Status: 99% of Employees and Contractors. 

Action: Contractor Systems Reviews; 
Status: 100%. 

Action: Annual Security Controls Testing;
Status: 100%. 

Action: Annual IT Contingency Plan Testing;
Status: 100%. 

Action: Privacy Impact Assessment; 
Status: 100%. 

Action: System of Record Notice; 
Status: 100% compliance. 

* The IRS certification program completed the third year of a three 
year cycle to certify all IRS reported systems. As of the end of the 
2008 FISMA reporting period, there were a total of 247 systems 
(applications and General Support Systems) in the FISMA inventory: 243 
had full Authority To Operate (ATO) and 4 had Interim Authority To 
Operate (IATO). For all ATO and IATO systems, weaknesses identified 
during Security Test and Evaluations, Privacy Impact Assessments, and 
Security Risk Assessments 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 247 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. 

Progress Made on Earned Income Tax Credit (EITC) FMFIA Material 
Weakness: 

In FY 2008, the IRS completed the necessary actions to support a 
downgrade of the FMFIA Material Weakness for EITC. Actions taken in 
support of the downgrade include: 

* Closure of 38 milestones associated with corrective actions. 

* Establishment of measures and diagnostics for those functions that 
deliver EITC related compliance, outreach and support activities. 

* Accountability through the centralization of activities under a 
single executive. 

* Development of full cost computation for the key EITC compliance 
activities; and, improved service, fairness Compliance with EITC under 
the Commissioner’s five point initiative. 

Impressive results from these actions include: 

* Increases in revenue protected in the EITC underreporter program 
(190%) and base compliance activities (35%). 

* Reductions in the “no change” rate (59%) on EITC examination cases. 

* Improvements in the full cost Return On Investment for compliance 
activities (12:1 for EITC examinations and 67:1 for EITC underreporter 
cases). 

The GAO reviewed the IRS progress and agreed they will not oppose a 
downgrade. The EITC FMFIA Material Weakness was downgraded September 
30, 2008. 

Modernize the IRS through its People, Processes, and Technology: 

In FY 2008, the Business System Modernization Program met cost and
schedule estimates for most releases and delivered significant business
value. 

FY 2008 successes include: 

Business Systems Modernization: 

* Customer Account Data Engine (CADE). The 2008 CADE release was 
delivered on time for the filing season and processed 30.6 million 
returns, a substantial increase from the 2007 posting of 11.2 million 
returns, and issued over 28.9 million refunds, totaling more than $44.1 
billion exclusive of stimulus payments. CADE settles daily, allowing 
CADE to process refunds on average five days faster than the legacy 
system and to update taxpayer account information immediately for 
customer service personnel, rather than weekly in the legacy system. 

* Modernized e-File (MeF). MeF provides e-Filing capability for large
corporations, small businesses, partnerships, and non-profit 
organizations. MeF benefits both taxpayers and the IRS by enabling
taxpayers to file all of their tax forms electronically, eliminating the
need for the IRS to match paper documents to electronic returns. 
Additionally, MeF allows more robust error checking and data validation 
before returns are processed, reducing the number of returns that need 
manual intervention and correction. 

MeF has processed over 6 million business tax returns. The fifth 
release of MeF went into production as planned early in 2008 providing 
the ability to file electronically Form 1120F (tax returns for foreign 
corporations) and Form 990N (also known as the electronic postcard for 
small tax-exempt organizations to meet their filing requirement). In 
2008, MeF accepted over 3.7 million returns, a 55% increase over last 
year. 

* Account Management Services (AMS). AMS is designed to improve support 
and functionality by bridging the gap between modernization initiatives 
like CADE and existing legacy systems. AMS allows on demand real-time 
access, validation, and update of taxpayer accounts. AMS provided on-
line address change capability for CADE accounts completing 1,064,000 
address changes. The 2008 releases of AMS provided automated inventory 
and workflow capabilities distributing over 733,000 electronic 
transcript cases to IRS campuses, increasing functionality for customer 
service representatives. 

IT Security: 

The IRS is entrusted with a tremendous amount of sensitive information.
Protecting this information is vital to maintaining the public trust 
that encourages voluntary compliance with the tax law and enables the 
IRS to conduct business effectively. The IRS protects taxpayer 
personally identifiable information, including Social Security numbers. 
In addition, the IRS actively ensures the security of its 
infrastructure and IT systems. 

In FY 2008, the IRS took the following actions to protect the tax
administration systems from unauthorized access, disruption and
modification: 

* Established the Office of Online Fraud Detection and Prevention to 
address increasing and evolving threats online affecting the IRS and
taxpayers; 

* Continued risk assessments of business processes to address identity 
protection and analyzed the use of social security numbers for 
reduction and elimination where possible; 

* Updated the IRS Identity Protection Strategy, a comprehensive 
strategy to protect personal information and provide services to 
identity theft victims; 

* Completed corrective action plan to address IT Security Training,
systems auditing, access controls, system security configuration
control, and IT systems disaster recovery; and; 

* Established agency-wide security policies and standards. 

Human Capital: 

The IRS continues to ensure the workforce is prepared to carry out the
IRS mission and to address the issues of increasing numbers of 
retirements and competition for skilled candidates to fill positions. In
FY 2008, the IRS: 

* Developed recruitment strategies to improve candidate selection and
expanded the use of recruitment incentives to attract highly qualified
candidates; 

* Conducted analysis of turnover rates by using a cost model index to
determine the cost and reasons for turnover; 

* Increased the accessibility of the application process for mission
critical positions through automation, simplification, and the use of
hiring incentives; and; 

* Expanded the Succession Management Program and the Leadership
Succession Review tool to levels below senior executive. 

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 2008, the IRS adhered to the internal control requirements of
FMFIA, the Office of Management and Budget (OMB) Circular A-123,
and the Reports Consolidation Act of 2000. 

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 protected from waste, fraud, abuse,
mismanagement, and misappropriation of funds; 

* Laws and regulations are followed; 

* Controls are sufficient to minimize improper and erroneous payment; 

* 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 outstanding material weaknesses and the custodial 
financial management systems do not substantially comply with FFMIA, 
the IRS provides qualified assurance that the above-listed systems of 
management control objectives were achieved by the IRS during FY 2008. 
This assurance is provided relative to Sections 2 and 4 of FMFIA. The 
FMFIA material weaknesses are: 

* Improve Modernization Management and Processes. 

* Computer Security. 

* Financial Accounting of Revenue – Custodial. 

Federal Financial Management Improvement Act (FFMIA): 

The IRS made significant progress bringing the custodial financial
management systems into compliance with FFMIA. In FY 2008, the IRS
implemented two additional releases of the Custodial Detailed Database
(CDDB), thus creating the subsidiary ledgers for revenue receipts and
refunds with traceability between CDDB and the Interim Revenue 
Accounting and Control System (IRACS). The IRS also established 
traceability of revenue and refunds from the electronic payment 
systems. 

Lien Release Non-Compliance Issue: 

As of September 30, 2008, 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) continues to monitor the action 
plan which addresses lien release issues identified by the IRS, 
Government Accountability Office (GAO), and the Treasury Inspector 
General for Tax Administration (TIGTA). 

Reports Consolidation Act of 2000: 

The IRS continues to provide 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 are in place to 
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: 

The GAO, TIGTA, and the OIG for Treasury identified several Management 
Challenges and High-Risk Areas facing the IRS. The IRS is addressing 
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 are the most serious 
management and performance challenges identified by GAO, TIGTA, and the 
OIG in order of priority: 

* Modernization of the Internal Revenue Service (Computerized Systems 
and Business Structure) and IRS Business Systems; 

* Tax Compliance Initiatives; 

* Security of the Internal Revenue Service; 

* Providing Quality Taxpayer Service Operations; 

* Complexity of the Tax Law; 

* Human Capital; 

* Erroneous and Improper Payments; 

* Taxpayer Protection and Rights; 

* Processing Returns and Implementing Tax Law Changes During the Tax 
Filing Season; 

* Using Performance and Financial Information for Program and Budget 
Decisions. 

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 the 
IRS is a component of the U.S. Government, a sovereign entity. 

[End of section] 

Financial Highlights: 

Overview of Revenue and Administrative Accounts: 

The IRS FY 2008 financial statements received an unqualified audit 
opinion for the ninth consecutive year. 

The Balance Sheet reflects total assets of $36 billion of which $29 
billion (81%) are Federal Taxes Receivable, which represents amounts 
expected to be collected from past due accounts. The $4 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 
$2.74 trillion in federal tax receipts. 

Financing Sources: 

The IRS receives the majority of its funding through annual and multi-
year 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). 

Custodial Detail Database (CDDB): 

CDDB was developed by the IRS 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 (TFRP) assessments and the lack of a subsidiary 
ledger. During FY 2008, noteworthy accomplishments for CDDB include: 

* Achieved a 35% reduction in TFRP cross reference errors using CDDB
reports. 

* Classified $27 billion (77%) of the $35 billion TFRP inventory. 

* Implemented a 20 digit trace-ID in all payment systems which enabled 
CDDB to capture 100% of the pre-posted and posted revenue (Electronic 
Federal Tax Payment System (EFTPS) was implemented in FY 2007). CDDB is 
now able to identify each individual payment. 

Financial Highlights: 

Revenue and Refund Trend Information: 

FY 2008 revenue receipts collected by IRS, $2.74 trillion, increased by
approximately 2% from FY 2007. 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. 

The FY 2008 tax refund activity of $425.7 billion includes the Economic
Stimulus payments of $94.3 billion. This is an increase of approximately
46% from FY 2007. Refund activity without the stimulus amount is $331.4
billion and represents an increase of approximately 13% over FY 2007. 
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 2008, the IRS issued payments of $51.8 million for Advanced 
Earned Income Tax Credit. 

Excise Taxes: 

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 2005 through September 2007. The 
Treasury Department’s Financial Management Service and the Bureau of 
Public Debt prepare the warrants and allocations to the various Trust 
Funds. 

Airport & Airway Trust Fund; 
Liability Quarter Ended: December 2005 – September 2006: 
$10,183,465,000; 
Liability Quarter Ended: December 2006 – September 2007: 
$11,531,893,000. 

Black Lung Disability Trust Fund; 
Liability Quarter Ended: December 2005 – September 2006: $607,881,000; 
Liability Quarter Ended: December 2006 – September 2007: $651,394,000. 

Highway Trust Fund; 
Liability Quarter Ended: December 2005 – September 2006: 
$41,019,915,000; 
Liability Quarter Ended: December 2006 – September 2007: 
$39,891,934,000. 

Total; 
Liability Quarter Ended: December 2005 – September 2006: 
$51,811,261,000; 
Liability Quarter Ended: December 2006 – September 2007: 
$52,075,221,000. 

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 2008 Financial Statements, the unpaid 
assessment balance was approximately $278 billion as of September 30, 
2008. Under federal accounting standards, unpaid assessments require 
tax-payer 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 write-offs. The following provides detail on unpaid assessments: 

* Taxes receivable represent $112 billion (39%) of unpaid assessments 
and increased $14 billion (14%) from $98 billion as of September 30, 
2008. About $83 billion (74%) of this balance is estimated to be 
uncollectible. Except for bankruptcy situations, the IRS may continue
collection actions for 10 years after the assessment. About $29 billion 
(26%) of taxes receivable is estimated to be collectible. 

* Compliance assessments of $67 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 $99 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 $159 billion (57%) of the unpaid assessment balance as of 
September 30, 2008, consists of interest and penalties and is largely
uncollectible. 

The Integrated Financial System (IFS): 

IFS provides timely financial statements and reports in accordance with
the federal accounting and reporting standards including information for
budgeting, analysis, and government-wide reporting. In addition, IFS
provides the core processes of General Ledger, Accounts Payable, 
Accounts Receivable, Budget Execution, Cost Accounting, Administrative
Tax and Travel Accounting, Cost Allocations, some tax processing 
functionality for Health Care Tax Credit Payments (HCTC), Budget 
Formulation, Labor Forecasting and Budget Execution decision support.
Detailed financial, cost accounting, property accounting and procurement
data is available for authorized users. Significant accomplishments
for FY 2008 include: 

* Successfully migrated all interfaces to a secure protocol; 

* Integrated eGov data for travel payment and postings; 

* Enhanced the HCTC interface to support anticipated increases based
on legislative changes. 

[End of section] 

Appendix A: Organizational Chart: 

Department Of The Treasury: 
Internal Revenue Service: 

Commissioner; Chief of Staff: 
- Chief Counsel; 
- Appeals; 
- National Taxpayer Advocate; 
- EEO and Diversity; 
- Research, Analysis and Statistics; 
- Communications and Liaison. 

* Deputy Commissioner, Services and Enforcement: 
- Office of Professional Responsibility; 
- Whistleblower Office; 
- Small Business/Self-Employed; 
- Large and Mid-Sized Business; 
- Wage and Investment; 
- Tax Exempt and Government Entities; 
- Criminal Investigation. 

* Deputy Commissioner, Operations Support; 
- Privacy, Information Protection, and Data Security Office; 
- Chief Information Officer; 
- Chief Financial Officer; 
- Agency-Wide Shared Services; 
- Human Capital Officer. 

[End of Appendix A] 

Appendix B: Performance Measurement Data: 

Goal 1: Improve Taxpayer Service: 

Measure: Customer Service Representative (CSR) Level of Service; 
2005: 82.6%;
2006: 82.0%;
2007: 82.1%;
2008 Target: 82.0%;
2008 Actual: 52.8%. 

Measure: Customer Contacts Resolved per Staff Year; 
2005: 7,585;
2006: 7,414;
2007: 7,648;
2008 Target: 8,000;
2008 Actual: 12,634. 

Measure: Percent of Eligible Taxpayers Who File for EITC (CY); 
2005: 80.0%
2006: [A]; 
2007: [A]; 
2008 Target: 75%-80%; 
2008 Actual: [A]. 

Measure: Customer Accuracy – Tax Law Phones; 
2005: 89.0%;
2006: 90.9%;
2007: 91.2%;
2008 Target: 91.0%;
2008 Actual: 91.2%. 

Measure: Customer Accuracy – Customer Accounts (Phones); 
2005: 91.5%;
2006: 93.2%;
2007: 93.4%;
2008 Target: 93.5%;
2008 Actual: 93.7%. 

Measure: Timeliness of Critical Filing Season Tax Products to the 
Public; 
2005: 91.4%;
2006: 83.0%;
2007: 83.5%;
2008 Target: 86.0%;
2008 Actual: 92.4%. 

Measure: Timeliness of Critical Other Tax Products to the Public; 
2005: 80.0%;
2006: 61.2%;
2007: 84.0%;
2008 Target: 86.0%;
2008 Actual: 89.5%. 

Measure: Percent Individual Returns Processed Electronically; 
2005: 51.1%; 
2006: 54.1%; 
2007: 57.1%; 
2008 Target: 61.8%; 
2008 Actual: 57.6%. 

Measure: Cost per Taxpayer Served ($) (HCTC); 
2005: N/A;
2006: $13.71;
2007: $14.90;
2008 Target: $14.25;
2008 Actual: $16.94. 

Measure: Sign-Up Time (Days) – Customer Engagement (HCTC); 
2005: 98.1;
2006: 98.7;
2007: 93.3;
2008 Target: 97.0;
2008 Actual: 94.0. 

Measure: Percent Business Returns Processed Electronically; 
2005: 17.8%;
2006: 16.6%;
2007: 19.1%;
2008 Target: 20.8%;
2008 Actual: 19.4%. 

Measure: Refund Timeliness – Individual (Paper); 
2005: 99.2%;
2006: 99.3%;
2007: 98.9%;
2008 Target: 98.4%;
2008 Actual: 99.1%. 

Measure: Taxpayer Self Assistance Rate; 
2005: 42.5%;
2006: 46.8%;
2007: 49.5%;
2008 Target: 51.5%;
2008 Actual: 66.8%. 

Goal 2: Enforcement of the Tax Law: 

Measure: Examination Coverage – Individual; 
2005: 0.9%;
2006: 1.0%;
2007: 1.0%;
2008 Target: 1.0%;
2008 Actual: 1.0%. 

Measure: Field Examination Embedded Quality; 
2005: N/A; 
2006: 85.9%;
2007: 85.9%;
2008 Target: 87.0%;
2008 Actual: 86.0%. 

Measure: Office Examination Embedded Quality; 
2005: N/A
2006: 88.2%;
2007: 89.4%;
2008 Target: 90.0%;
2008 Actual: 90.0%. 

Measure: Examination Quality – Industry; 
2005: 77.0%;
2006: 85.0%;
2007: 87.0%;
2008 Target: 88.0%;
2008 Actual: 88.0%. 

Measure: Examination Quality – Coordinated Industry; 
2005: 89.0%;
2006: 96.0%;
2007: 96.0%;
2008 Target: 96.0%;
2008 Actual: 97.0%. 

Measure: Examination Coverage – Business (Corps. >$10M); 
2005: 7.8%;
2006: 7.3%;
2007: 6.8%;
2008 Target: 6.6%;
2008 Actual: 6.1%. 

Measure: Examination Efficiency – Individual (1040); 
2005: 121; 
2006: 128; 
2007: 137; 
2008 Target: 133; 
2008 Actual: 138. 

Measure: Automated Underreporter (AUR) Efficiency; 
2005: 1,701;
2006: 1,832;
2007: 1,956;
2008 Target: 1,961;
2008 Actual: 1,982. 

Measure: Automated Underreporter (AUR) Coverage; 
2005: 2.2%;
2006: 2.4%;
2007: 2.5%;
2008 Target: 2.5%;
2008 Actual: 2.55%. 

Measure: Collection Coverage – Units; 
2005: 53.0%;
2006: 54.0%;
2007: 54.0%;
2008 Target: 53.0%;
2008 Actual: 55.2%. 

Measure: Collection Efficiency – Units; 
2005: 1,514;
2006: 1,677;
2007: 1,828;
2008 Target: 1,835;
2008 Actual: 1,926; 

Measure: Field Collection Embedded Quality; 
2005: N/A;
2006: 84.2%;
2007: 84.0%;
2008 Target: 86.0%;
2008 Actual: 79.0%. 

Measure: Automated Collection System (ACS) Accuracy; 
2005: 88.5%; 
2006: 91.0%; 
2007: 92.9%; 
2008 Target: 92.0%; 
2008 Actual: 95.3%. 

Measure: Criminal Investigations Completed; 
2005: 4,104;
2006: 4,157;
2007: 4,269;
2008 Target: 4,000;
2008 Actual: 4,044. 

Measure: Number of Convictions; 
2005: 2,151;
2006: 2,019;
2007: 2,155;
2008 Target: 2,135;
2008 Actual: 2,144. 

Measure: Conviction Rate; 
2005: 91.2%;
2006: 91.5%;
2007: 90.2%;
2008 Target: 92.0%;
2008 Actual: 92.3%. 

Measure: Conviction Efficiency Rate ($); 
2005: $295,316;
2006: $328,750;
2007: $301,788;
2008 Target: $317,625;
2008 Actual: $315,751. 

Measure: TE/GE Determination Case Closures; 
2005: 126,481;
2006: 108,462;
2007: 109,408;
2008 Target: 100,600;
2008 Actual: 100,050. 

Goal 3: Modernize the IRS through its People, Processes, and Technology 

Measure: Percent of BSM Projects within +/-10% Cost Variance; 
2005: N/A;
2006: N/A;
2007: [B]; 
2008 Target: Baseline;
2008 Actual: 92.0%. 

Measure: Percent of BSM Projects within +/-10% Schedule Variance; 
2005: N/A;
2006: N/A;
2007: [B]; 
2008 Target: Baseline;
2008 Actual: 92.0%. 

[A] The methodology for estimating the eligibility rate is being 
revised. 

[B] Cost and Schedule variance is based on +/-10% and was reported 
separately for each project release/subrelease. In FY 2008, these
measures were changed to reflect an overall percentage of all projects 
that were within the +/-10% threshold for cost and schedule variance. 

[End of Appendix B] 

Appendix C: Explanation of Shortfalls: 

Customer Service Representative (CSR) Level of Service: For FY 2008, 
the CSR Level of Service (LOS) was 52.8%, roughly 29 percentage points 
below the target of 82%. The shortfall was caused by the high call 
volume from the Economic Stimulus Payment (ESP) issuance. Assistor 
Services were 119% of plan and Calls Answered were 123% of plan as a 
result of ESP demand. The IRS realigned resources to answer calls and
seasonal employees were kept on board longer. 

Percent Individual Returns Processed Electronically: For FY 2008, the 
Percent of Individual Returns Processed Electronically was 57.6% which 
is 4.2 percentage points below the target of 61.8%. Excluding taxpayers 
who filed solely to claim an economic stimulus payment, the percentage 
of e-file returns would have been 63%. 

Cost per Taxpayer Served ($) (HCTC): For FY 2008, the cumulative cost 
per taxpayer served was $16.94, 19% above the target of $14.25. A 
decrease in the number of taxpayers eligible and enrolled for the 
credit, fewer taxpayers conducting business through the HCTC call 
center, and increased contractor rates are among the reasons for the 
increase in the Cost Per Taxpayer Served. 

Percent Business Returns Processed Electronically: For FY 2008, the 
Percent of Business Returns Processed Electronically was 19.4% which is 
1.4 percentage points below the target of 20.8%. A significant decrease 
(nearly 28.5%) in projected volume of electronically filed Forms 1041, 
primarily due to a regulation change allowing certain grantor trusts to 
be reported on Form 1099 instead of Form 1041, contributed to the 
decline. 

Field Examination Embedded Quality: For FY 2008, the quality score was 
86%, 1 percentage point below the target of 87%. During FY 2008, a 
quality action plan was implemented to address weaknesses identified
within the Timeliness, Income Probe and Multi-year Pick Up attributes. 
In addition, area quality improvement teams were established to address 
area specific quality weaknesses. As a result of these efforts, 
significant improvements within the quality score were realized during 
the second half of FY 2008. 

Examination Coverage – Business (Corps. >$10M): IRS exceeded its large 
business return closures goal of 13,059 returns, closing 13,186 
returns. However, the coverage percentage dropped to 6.1% due to higher
than estimated return filings. The IRS emphasis on streamlining and 
improving the examination process, coupled with better risk analysis, 
will continue to provide for early resolution of post-filing 
examination issues and enhance large business examination coverage. 

Field Collection Embedded Quality: For FY 2008, the quality score was 
79%, 7 percentage points below the target of 86%. Effort to reduce the 
number of aged cases in the quality inventory, coupled with the overall
quality of the older cases had an impact on the cumulative quality 
score. Improvements to job aids, continuation of quarterly reviews and 
an annual “Quality Summit” focusing on specific quality attributes in 
need of improvement are ongoing to focus attention on case quality. 

TE/GE Determination Case Closures: The IRS was within 1% of its target. 
The shortfall resulted from the increasing number of applications that 
are subject to an in-depth review for potential abuses in the Exempt
Organizations determination program. These applications, along with 
others identified for potential promoter or fraud issues during the 
screening process, required more extensive development and coordination 
than the traditional determination workload, resulting in higher hours 
per case. The shortfall was minimized due to the increase in merit 
closures, which required fewer hours to complete. 

[End of Appendix C] 

Appendix D: Performance Measures Descriptions: 

Goal 1: Improve Taxpayer Service: 

Customer Service Representative (CSR) Level of Service: 
The number of toll free callers that either speak to a Customer Service
Representative or receive automated 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 time expended
expressed in staff years where a staff year is equivalent to a position 
filled full time every paid day of the year, including holidays. 

Percent of Eligible Taxpayers Who File for EITC: 
The number of taxpayers who claim the Earned Income Tax Credit (EITC) 
on a tax return compared to the number of taxpayers who appear to be 
eligible for the credit based on Census Bureau data. 

Customer Accuracy – Tax Law Phones: 
The percentage of correct tax law answers given by a call center 
assistor on the IRS Toll-free lines. 

Customer Accuracy – Customer Accounts (Phones): 
The percentage of correct account answers given by a call center 
assistor on the IRS Toll-free lines. 

Timeliness of Critical Filing Season Tax Products to the Public: 
The percentage of filing season critical tax products made available, 
paper or electronically, to individual taxpayers by early January. 
(Critical tax products include the forms, schedules, instructions and 
publications that a large number of taxpayers need to prepare a 
complete and accurate individual income tax return by April 15.) 

Timeliness of Critical Other Tax Products to the Public: 
The percentage of filing season critical tax products made available, 
paper or electronically, to businesses, tax-exempt organizations, and 
government entities in a timely fashion. (Critical tax products include 
the forms, schedules, instructions and publications that a large number 
of taxpayers need to prepare a complete and accurate return/form by the 
scheduled due date.) 

Percent Individual Returns Processed Electronically: 
The number 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 eligible for the Health 
Coverage Tax Credit (HCTC). (Costs include correspondence, 
registration, and program participation.) 

Sign-Up Time (Days) – Customer Engagement (HCTC): 
The length of time between mailing of the HCTC registration kit and 
when the participant receives the first payment. 

Percent Business Returns Processed Electronically: 
The number of electronically filed business tax returns divided by the 
total business tax returns filed. 

Refund Timeliness – Individual (Paper): 
The percentage of refunds issued within 40 days of receipt for 
individual income tax returns submitted on paper. 

Taxpayer Self Assistance Rate: 
The percentage of all taxpayer assistance requests resolved using self-
assisted automated services (includes automated calls answered and 
Internet services completed). 

Goal 2: Enforcement of the Tax Law: 

Examination Coverage – Individual (1040): 
The sum of all 1040 audits completed in the current fiscal year divided 
by the total individual income tax return filed the prior calendar 
year. 

Field Examination Embedded Quality: 
The number of quality elements (important steps in resolution of an 
examination case assigned to a revenue agent in the field) that are 
scored as "met" by an independent reviewer divided by the total number 
of quality elements (met and not met). Sample is comprised of closed 
cases and all quality elements are considered equally. 

Office Examination Embedded Quality: 
The number of quality elements (important steps in resolution of an 
office examination case assigned to a tax compliance officer) that are 
scored as "met" by an independent reviewer divided by the total number 
of quality elements (met and not met). Sample is comprised of closed 
cases and all quality elements are considered equally. 

Examination Quality – Industry: 
The number of quality elements (important steps in the examination of 
Industry cases (corporations and partnerships with assets over $10 
million)) scored as “met” by an independent quality reviewer. Quality 
elements include technical standards and administrative procedures, 
which respectively account for 80 percent and 20 percent of the quality 
score. 

Examination Quality – Coordinated Industry: 
The number of quality elements (important steps in the examination of
Coordinated Industry cases (the 900 largest corporations) scored as 
“met” by an independent quality reviewer. Quality elements include 
technical standards and administrative procedures, which respectively 
account for 80 percent and 20 percent of the quality score. 

Examination Coverage – Business (Corps. >$10M): 
The sum of all corporate returns (with assets over $10 million) and 
partnership returns audited during the current fiscal year divided by 
the number of returns filed the prior calendar year. 

Examination Efficiency – Individual (1040): 
The sum of all individual 1040 individual income tax returns closed by 
the Field and Correspondence Examination programs during the current 
fiscal year divided by the total number of full-time staff utilized 
during the current fiscal year. 

Automated Underreporter (AUR) Efficiency: 
The total number of closed cases during the current fiscal year in the 
document matching program (where a taxpayer responded to the notice) 
divided by the total full-time staff utilized. 

Automated Underreporter (AUR) Coverage: 
The total number of closed cases during the current fiscal year in the 
document matching program (where a taxpayer responded to the notice) 
divided by the total number of 1040 individual income tax returns filed 
the prior calendar year. 

Collection Coverage – Units: 
The number of collection cases closed during the current fiscal year 
compared to the number of collection cases available for assignment. 

Collection Efficiency – Units: 
The total number of cases closed during the current fiscal year 
(delinquent accounts and delinquent returns) divided by the total 
number of full-time staff utilized. 

Field Collection Embedded Quality: 
The number of quality elements (important steps in the resolution of a 
collection case assigned to a revenue officer in the field) that are 
scored as "met" by an independent reviewer divided by the total number 
of quality elements (met and not met). Sample is comprised of closed 
cases during the current fiscal year and all quality elements are 
considered equally. 

Automated Collection System (ACS) Accuracy: 
The percentage of taxpayers that received the correct answer to their 
question and/or had their case resolved correctly based on all 
available information. 

Criminal Investigations Completed: 
The total number of criminal investigations completed during the fiscal 
year. (Includes both cases recommended for prosecution and cases 
discontinued for lack of prosecution potential.) 

Number of Convictions: 
The number of criminal convictions. 

Conviction Rate: 
The percentage of judicially decided criminal cases resulting in a 
conviction. 

Conviction Efficiency Rate ($): 
The cost of the IRS Criminal Investigation program divided by the 
number of convictions. 

TE/GE Determination Case Closures: 
The number of cases closed where the IRS has made a decision on 
requests for tax exempt status or employee plan qualification. 

Goal 3: Modernize the IRS through its People, Processes, and 
Technology: 

Percent of BSM Projects within +/-10% Cost Variance: 
The percentage of BSM projects that are within the +/-10% threshold for 
cost. The cost variance is measured from the initial cost estimate 
versus current cost estimate. 

Percent of BSM Projects within +/-10% Schedule Variance:
The percentage of BSM projects that are within the +/-10% threshold for
schedule. The schedule variance is measured from the initial schedule 
estimate to the current schedule estimate. 

[End of Appendix D] 

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 2008 accomplishments, 
actions identified for completion in FY 2009 and beyond, and future 
challenges. These have been arranged in the order of priority as 
determined by the TIGTA. 

Modernization of the Internal Revenue Service (Computerized Systems and 
Business Structure) and IRS Business System: 

Challenge/Issue: 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:
* Customer Accounts Data Engine (CADE). The newest CADE Release was
delivered on time for the filing season and processed 30.6 million 
returns, an increase from the 2007 posting of 11.2 million returns. 
CADE not only stores the taxpayer data on a modernized data base, but 
also settles daily, so CADE processes refunds on average five days 
faster than the IRS master file. For 2008, CADE issued over 28.9 
million refunds, in excess of $44.1 billion exclusive of stimulus 
payments. CADE settles daily, allowing CADE to process refunds on 
average five days faster than the legacy system and to update taxpayer 
account information immediately for customer service personnel, rather 
than weekly in the legacy system.
* Delivered the Economic Stimulus Package (ESP) checks to taxpayers 
ahead of schedule, a direct result of CADE daily processing 
capabilities, in contrast to the legacy system’s weekly processing.
* Modernized e-File (MeF). In 2008, MeF accepted over 3.7 million 
returns, a 55% increase over last year. Overall, MeF has processed over 
6 million tax returns. The fifth release of MeF went into production as 
planned early in 2008 providing the ability to file electronically Form 
1120F (tax returns for foreign corporations) and Form 990N (also known 
as the electronic postcard for small tax-exempt organizations to meet 
their filing requirement).
* Account Management Services (AMS). AMS is designed to improve support 
and functionality by bridging the gap between modernization initiatives 
like CADE and existing legacy systems. AMS allows on demand real-time 
access, validation, and update of taxpayer accounts. AMS provided on-
line address change capability for CADE accounts completing 1,064,000 
address changes. The 2008 releases of AMS provided automated inventory 
and workflow capabilities that distributed over 733,000 electronic 
transcript cases to IRS campuses and increased functionality for the 
customer service representatives.
* Delivered the majority of Modernization project releases within cost 
and on schedule.
* Expanded the research data base for the expanded Collection Data 
Warehouse including additional information from the Individual and 
Business Master Files and combining it with the Automated Collection 
System information to provide the ability to conduct quantitative 
analysis to improve workload identification, case selection, and 
prioritization. Results include improved inventory modeling and 
increased productivity.
* Expanded the Reasonable Cause Assistant (RCA) to improve the accuracy 
and consistency of individual taxpayer and business taxpayer penalty 
relief determinations. 
* Piloted web-based criminal investigation knowledge management systems 
allowing employees in the field to gain immediate, nationwide access to 
training materials, best practices, discussion threads, and guidance to 
assist them in their investigations. Also piloted an e-Library, a 
centralized repository for all nationwide interim policy and procedural 
memoranda, providing employees “one-stop shopping” for National Meeting 
Minutes, Official Handbooks, and historical documents. 
* Upgraded the Issue Management System (IMS) to provide a central 
repository for issue identification and tracking and allow data 
collection that can be used to develop and evaluate performance 
measures. The upgrade supported more than 5,000 revenue agents.
* Developed a Data Access Strategy to consolidate data from multiple 
applications and produce a data repository for issue detection and case 
selection. Integrated data solutions allow the IRS to retire 
duplicative and costly data extracts from multiple systems.
* Established a Program/Project Health Assessment, to examine the 
“health” of all IT projects to provide independent early-warning 
indicators to managers and governance organizations concerning projects 
facing unusual challenges that can influence the filing season or other 
critical IRS functions. 

Actions Planned or Underway for FY 2009 and Beyond: 
* Deliver production pilot for CADE Release 4 adding capabilities to 
process other types of returns such as decedent, prior-year returns, 
extension requests, and refund hold capability, along with additional 
notices for child tax credits and direct deposit math error.
* Complete delivery of AMS Release 1 to provide additional real-time 
transaction updates to CADE, new inventory and workflow capabilities 
and closure capabilities for account transcript functionality.
* Identify additional functionality for the Issue Management System 
including incorporating a multi-year planning tool to enable analysts 
to create “what-if” scenarios and perform multi-year comparisons. 

Tax Compliance Initiatives: 

Challenge/Issue: 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) noncompliance; 
Individuals and Businesses; Actions Taken:
* Collected $56.4 billion in enforcement revenue, a 65% increase since 
2002.
* Increased examination closures for taxpayers with income over 
$200,000 by almost 16%. Maintained audits of corporations and flow-
throughs with assets under $10 million in FY 2008.
* Targeted preparers and promoters whose tax work indicated 
questionable return preparation practices and assessed over $103 
million in penalties.
* Used new enforcement tools to improve the quality and reliability of 
real property appraisals submitted by taxpayers, which increased the 
number of penalties assessed against appraisers and referrals to the 
Office of Professional Responsibility.
* Established the Industry Issue Focus approach to concentrate on high 
risk tax issues and ensure that the IRS employs a strategic approach to 
managing them. This tiered process significantly reduces the amount of 
time and resources to examine cases, reduces taxpayer burden, and 
improves productivity.
* Assessed $21.1 million in tax and penalties against employees of 
foreign embassies, consulates, and international organizations as a 
result of an Embassy Settlement Initiative.
* Partnered with SEC to identify corporations with potential backdating 
of stock options, generated more than $1.65 billion in tax and penalty 
assessments and closure of 1,329 return examinations.
* Implemented enhancements to the Automated Underreporter inventory 
selection process. Enhancements resulted in increases in overall 
assessment dollars 26% and assessment dollars per case 21%. 
* Improvements in training of fraud examiners resulted in a 6.9% 
increase in fraud development cases and increases of more than 21% in 
civil fraud penalty recommendations over 2007 levels.
* Continued focus on resolving abusive transactions through the Global 
Settlement Initiative resulted in the securing of more than 1,605 
delinquent returns and recommending for assessment over $3.04 billion 
in taxes.
* Continued analysis of National Research Program (NRP) results from 
Forms 1040 and 1120S studies to identify where and why compliance 
problems occur. Conclusions translated into modifications to return 
classification and selection routines as well as development of Tax Gap 
Fact sheets to address issues identified.
* Identified through the Electronic Fraud Detection System more than 
337,000 potentially fraudulent returns claiming more than $1.7 billion 
in refunds and stopped over $1.5 billion in fraudulent claims with an 
average refund of $5,303. 
* Initiated 230 new Questionable Refund Program investigations 
resulting in a 92.3% conviction rate, an 83.5% incarceration rate, and 
an 88.5% publicity rate on adjudicated cases. 
* Expanded Suspicious Activity Report (SAR) Review Teams at ten 
locations across the country. These task forces allow federal, state, 
and local law enforcement agencies to combine their unique skills to 
identify and investigate individuals and organizations engaged in a 
wide-range of criminal activity. These task forces disrupt and 
dismantle criminal enterprises by seizing and forfeiting the assets.
* Deployed Operation Malicious Mortgage to combat mortgage fraud, 
resulting in 144 mortgage fraud cases in which 406 defendants were 
charged. 
* Completed EITC return preparer due diligence audits, reviewing paid 
preparers’ compliance with EITC due diligence requirements, and 
recommended over $570,000 in due diligence penalties.
* Developed an yK1 Link Analysis prototype, which uses K-1 data from 
corporations, flow-through returns, and high income individuals to 
identify relationships and income/loss flow between payers and payees. 
This helps examiners determine if a taxpayer has engaged in potentially 
abusive tax schemes. The project was recognized as a Top 20 finalist 
for the 2008 Excellence.Gov Award. 

Actions Planned or Underway for FY 2009 and Beyond: 
* Identify and test alternative methods of workload selection for 
offshore cases.
* Update Audit Technique Guides which serve as reference material to 
both internal users and external stakeholders.
* Implement an updated Discriminant Analysis System (DAS) to identify 
corporate returns that are likely to have significant reporting 
noncompliance.
* Continue compiling and testing business rules for identifying 
reporting noncompliance as part of the rollout of the new Selection, 
Workload, and Classification system.
* Introduce new M-3 for Form 1120F to gather information on foreign 
controlled corporations. 
* Address offshore and cross-border compliance risks through 
enforcement and by issuing guidance and expanding relationships and 
collaboration with foreign tax administrations to increase informal and 
formal communications on international tax administration matters.
* Litigate cases and work settlements and design large scale resolution 
initiatives for tax shelter transactions to deter noncompliance.
* Increase industry and global issues focus by aligning resources to 
cases and issues with the highest compliance risk.
* Test new EITC paid preparer treatments to determine the effect of 
early education and intervention on the accuracy of EITC returns 
prepared by first-time paid preparers, including first-time EITC paid 
preparer education and compliance notices and telephone contacts.
* Implement corporate non-filer measures and align activity consistent 
with those measures.
* Continue to enhance Examination and AUR case selection and modeling. 
* Test an Automated Under-Reporter Soft Notice program that provides 
the taxpayer the opportunity to self-correct income reporting errors. 
* Deliver a training program for Campus Fraud Coordinators in the first 
quarter of FY 2009. 

Tax-Exempt and Government Entities: Actions Taken: 
* Increased examinations by 3.4% and overall compliance contacts 6%.
* Conducted compliance checks of executive compensation practices among 
tax-exempt organizations to assess compliance risk of officers and 
executives and initiated a new phase to address loans to officers.
* Launched Form 990-N, Electronic Notice for Tax-Exempt Organizations 
Not Required to file Form 990 or 990-Z (e-Postcard), for small tax-
exempt organizations to electronically file an annual information 
notice. Approximately 170,000 e-Postcards were filed in fiscal year 
2008. Failure to file the e-Postcard for three consecutive years will 
result in loss of tax exemption. 
* Implemented post-bond issuance policies and procedures for issuers and
borrowers of tax-exempt bond proceeds. Initiative included conducting 
several outreach presentations to encourage improved compliance 
procedures after bond issuance.
* Increased awareness of IRS Pension Plan Correction Programs via new 
fix-it guides and an educational workshop marketed for small business 
practitioners and encouraged them to use online IRS “Fix-It Guides” to 
help their clients find, fix, and avoid common retirement plan mistakes.
* Completed analysis of data from the first phase of a Risk Modeling 
program. Initial phase involved the examination of 200 organizations 
with 940 returns, of which, 234 delinquent returns were secured during 
the examinations. 
* Terminated or revoked the exempt status of 92 tax-exempt 
organizations as a result of targeted Abusive Tax Avoidance 
Transactions compliance projects. 
* Continued compliance initiatives to address tribal gaming and banking 
issues. 

Actions Planned or Underway for FY 2009 and Beyond: 
* Expand the use of risk modeling results for cases selection and test 
new models for other categories of examinations including exempt 
organizations that report gaming activities on Form 990.
* Identify promoters who use retirement plans as parties to abusive 
transactions.
* Continue the Combined Annual Wage Reporting project which deals with 
tax-gap implications of employment taxes for exempt organizations.
* Continue to assist Criminal Investigation and the Department of 
Justice in developing criminal cases and preparing their prosecutions 
on abusive tax-exempt bond situations. 

Security of the Internal Revenue Service: 

Challenge/Issue: Strengthening the security infrastructure and the
applications that guard sensitive data. 
Actions Taken: 
* Implemented Enterprise Disk Encryption Phase 2, encrypting all 
removable storage devices and media used with desktop and laptop 
computers.
* Established the Office of Online Fraud Detection and Prevention to 
address the threat of online fraud affecting the IRS and taxpayers. 
* Continued risk assessments of business processes to address identity 
protection vulnerabilities and analyzed the use of social security 
numbers for reduction and elimination where possible.
* Implemented Operation RED, the first phase of a comprehensive Data 
Loss Prevention Action Plan, to enhance awareness of data protection.
* Updated the IRS Identity Protection Strategy, a comprehensive 
strategy for protecting personal information and providing services to 
identity theft victims.
* Implemented an entirely new security code review against several 
IRS.gov applications.
• Developed a Manager’s Toolkit for performing security and after-hours 
reviews to assist managers in adhering to the Security Assurance 
Certification process. The toolkit provides instructions for completing 
the functional security reviews to ensure that existing security 
procedures and requirements are in place on a day-to-day basis. 

Actions Planned or Underway for FY 2009 and Beyond: 
* Implement the IT Asset Centralization initiative.
* Complete strategic security initiatives necessary to close the IRS 
Computer Security Material Weakness. 

Providing Quality Taxpayer Service Operations: 

Challenge/Issue: Providing top quality service to every taxpayer in 
every transaction is an integral part of the IRS’s strategic and
modernization plans.
Actions Taken:
* Implemented the Economic Stimulus Payment (ESP) initiative, issuing 
116.2 million payments totaling $94.3 billion with the first payments 
issued 55 workdays after passage of legislation.
* Launched the Economic Stimulus Payments Information Center on IRS.gov,
including areas for Frequently Asked Questions (FAQs), an Economic 
Stimulus Calculator, and “Where’s My Stimulus Payment?”
* Launched a data-driven outreach campaign targeting qualified 
individuals who normally do not have a filing requirement to claim 
their economic stimulus payment.
* Implemented Taxpayer Assistance Blueprint (TAB) service improvement 
initiatives, including establishment of the Taxpayer Services Program 
Management Office and Services Committee to provide senior executive 
coordination and governance to TAB implementation.
* Delivered a successful filing season, implementing all late 
legislation, including AMT changes by February 2008.
* Delivered Spanish interactive tax applications, including the Spanish 
version of “Where’s My Refund?”
* Released tax publications in more languages, including Chinese, 
Russian, Korean, and Vietnamese.
* Redesigned Form 990, Return of Organization Exempt from Income Tax. 
The instructions contain tools to facilitate understanding and ease 
preparation, including multiple reporting examples and illustrations. A 
three-year phase-in period will allow organizations, based on their 
gross receipts and assets, to file the Form 990-EZ, in lieu of the more 
complex Form 990.
* Designed a new determination pre-screening process that quickly 
identifies employee plan applications that have deficiencies. By 
returning deficient cases to taxpayers in a timely manner, they can 
resolve the identified deficiencies and reapply for a determination 
letter rather than waiting for a full review, which would result in a 
returned application at a much later date.
* Created a streamlined Voluntary Closing Agreement Program (VCAP) for 
Tax Exempt Bonds intended to lessen burdens on issuers who desire to 
resolve, on a voluntary basis, infractions with respect to their bonds. 
* Allowed taxpayers to use statistical sampling to claim deductions and 
credits they might not be able to claim otherwise. This program 
advances compliance goals, improves quality, and reduces costs while 
minimizing undue burden on taxpayers. 

Actions Planned or Underway for FY 2009 and Beyond: 
* Continue to implement TAB service improvement initiatives, including
recommending a set of measures to serve as the basis for a taxpayer 
scorecard to measure service improvements.
* Provide taxpayers who did not receive an Economic Stimulus Payment or 
received less than the maximum amount with information to claim the 
Recovery Rebate Credit.
* Identify optimal Taxpayer Assistance Center locations to improve 
geographic coverage. 

Complexity of the Tax Law: 

Challenge/Issue: 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:
* As part of the effort to complete the Study of Universal Use of 
Advanced Payment of Earned Income Credit (AEITC) mandated by Congress, 
interviewed employers to gain their insight into the benefits, costs, 
risks, and barriers if the advance earned income tax credit program 
were expanded.
* Continued to develop guidance in response to The Pension Protection 
Act of 2006.
* Developed a simplified employee plan application process for small 
employers.
* Presented Retirement Plan Pitfalls workshops to employers and plan
representatives unfamiliar with the employee benefits practice.
* Addressed 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.”
* Initiated compliance checks for up to 5,000 locally hired employees 
of foreign embassies, consulates, and international organizations. As a 
result, 2,100 individuals from 134 countries and international 
organizations participated in a settlement resulting in assessments of 
$21.1 million in tax and penalties.
* Enabled Modernized e-File (MeF) to electronically file Form 1120-F, 
U.S. Income Tax Return of a Foreign Corporation. In FY 2008, MeF 
accepted over 3.7 million returns, a 55% increase over FY 2007. 

Actions Planned or Underway for FY 2009 and Beyond: 
* Develop and implement multi-faceted treatments that will address 
underlying behavior that contributes to non-compliance, including a 
more comprehensive measurement approach.
* Create additional employee plans Fix-It Guides to help employers 
find, fix, and avoid common plan mistakes.
* Streamline the determination approval process for certain public 
charities. 
* Implement a Voluntary Compliance program to allow exempt 
organizations to fill delinquent returns and pay all taxes and 
applicable interest without penalty in order to avoid loss of their 
exempt status under new requirements imposed by the Pension Protection 
Act of 2006.
* Implement procedures to simplify and clarify processes for handling 
rebate refund cases for Tax-Exempt Bonds.
* Continue enforcement activities against the approximately 2,500 
noncompliant taxpayers who did not elect to participate in the hired 
settlement initiative. 

Human Capital: 

Challenge/Issue: 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:
* Implemented a pilot using coaches to strengthen management skills and 
increase employee engagement.
* Developed a Veterans Hiring Initiative. In FY 2008, the IRS exceeded 
its goal to hire 1,000 military veterans with the hiring of 1,203 
veterans.
* Achieved 87.2% of filing season hiring (a 5% improvement over FY 
2007); 4 out of 10 campus locations met or exceeded 90% of FY 2008 
filing season hiring.
* Delivered a $2.2 million multi-media advertising and marketing plan 
that supported national recruitment events and partnerships with 
national advocacy and support groups.
* Expanded the external HR Career Connector recruitment effort, 
addressing 60 occupations, and began the roll out of the internal merit 
promotion process. 
* Streamlined and automated the Candidate Development Program 
recruitment and selection process, successfully recruiting over 250 
qualified applicants.
* Redesigned the Tuition Assistance Program, spending $10.1 million on 
a total of 4,200 participants.
* Implemented an “Anchoring Change” strategy for employees in the Large 
and Mid-Size Division to strengthen the linkage between front line 
employees and all levels of management to improve communications, 
relationships, business processes, and business performance. 

Actions Planned or Underway for FY 2009 and Beyond: 
* Complete analysis of turnover rates, causes and costs.
* Develop a cost-index model to quantify turnover, with rollout to all 
business units.
* Simplify the application process and the use of hiring incentives.
* Implement a Corporate Incentive Strategy to recognize and retain 
managers.
* 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.
* Implement applicable “Workforce of Tomorrow” provisions related to:
- Valuing and retaining people;
- Planning a dynamic hiring strategy;
- Attracting the best candidates internally and externally; 
- Developing enhanced recruiting and career progression strategies;
- Streamlining;
- Growing future leaders;
- Enhancing the role of managers. 

Erroneous and Improper Payments: 

Challenge/Issue: Reduce improper payments that include base compliance
activities and redesign efforts.
Actions Taken: 
* Protected approximately $3.2 billion in revenue through EITC 
enforcement efforts, which included the examination of 500,000 returns 
and 30,000 amended returns claiming EITC, 375,000 document matching 
reviews, and 425,000 math error process corrections. 
* Identified more than 337,000 potentially fraudulent returns claiming 
over $1.7 billion in refunds, stopped over $1.5 billion in fraudulent 
claims using the Electronic Fraud Detection System, with an average 
refund of $5,303.
* Developed EITC outreach products and services, found innovative ways 
to market them to the vast stakeholder segments, and targeted 
underserved groups, such as rural taxpayers, childless workers, and the 
limited English proficient.
* Held a second IRS EITC Day, which generated extensive national and 
local media coverage. Conducted a national news conference, which was 
web cast with 18 reporters representing 7 television stations. More 
than 90 partners held news conferences. Over 80 organizations issued 
news releases, and more than 1,100 radio stations were reached via 
statewide radio networks. The IRS conducted 23 interviews with Spanish 
print and radio reporters and 24 satellite media tours throughout the 
country.
* Analyzed the results from the first year of the multi-year National 
Research Program study and updated error rate estimates based on TY 
2001 compliance study data to meet the Improper Payments Improvement 
Act annual requirement.
* Assessed results of FY 2008 enterprise research strategy and 
developed FY 2009 strategy in partnership with internal organizations 
to better focus EITC compliance and outreach activities using research 
data.
* Educated paid preparers on EITC due diligence requirements during EITC
seminars in several Nationwide Tax Forums.
* Published and distributed new paid preparer due diligence flyer to 
educate paid preparers on their EITC diligence requirements.
* Completed development of an updated EITC Concept of Operations 
(CONOPs), including the EITC Preparer Strategy, which targets effecting 
EITC error through progressive compliance treatments and outreach and 
education aimed at preparers. 

Actions Planned or Underway for FY 2009 and Beyond: 
* Refine campaigns and expand publicity for EITC Awareness Day based on 
focus group and internal feedback and coverage data to increase overall 
participation and improve compliance. 
* Complete activities associated with the fourth year of the EITC 
Return Preparer Study and analyze short-term outcomes, including 
penalties and accuracy of returns and outcomes from due diligence 
visits and education/compliance notices and phone calls to first-time 
EITC preparers. 
* Continue to identify and investigate high-impact EITC fraud and tax 
scheme promoters.
* Actively explore research-based cost-effective approaches to improve 
EITC participation and minimize errors. 

Taxpayer Protection and Rights: 

Challenge/Issue: 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: 
* Completed Federal Tax Levy Payment Program (FPLP) research project to
determine an approach to ensure levies processed against Social 
Security (SSA) and Railroad Retirement (RRB) benefits protect low 
income taxpayers. Results need further examination.
* Continued to enhance and refine the overall examination process 
through increased managerial involvement in all phases of the audit, 
encouraging examiners to address matters of substance as part of the 
audit and ensuring the impact on the taxpayer or representative is 
minimal.
* Completed 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.
* Completed the Service-wide Return Preparer Strategy and initiated
implementation.
* Established an enterprise approach to examine questionable claims and 
protect revenue before issuing refunds, focusing on identifying and 
releasing legitimate claims quickly. 

Actions Planned or Underway for FY 2009 and Beyond: 

* Establish oversight review/approval process for preparer penalties to 
ensure uniform and consistent application of penalties.
* Develop metrics for the return preparer program.
* Continue efforts to remove or redact SSN from outgoing correspondence.
* Determine impact of excluding all SSA recipients below certain income 
levels from FPLP. Meet with TAS to identify reliable indicators of 
ability to pay. 

Processing Returns and Implementing Tax Law Changes During the Tax 
Filing Season: 

Challenge/Issue: 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, while mitigating the impact of 
the late passage of the Alternative Minimum Tax legislation and 
administration of the provisions of the Economic Stimulus Act:
- Processed 155.6 million individual returns, an increase of 11%, and 
issued 107.6 million refunds totaling $369 billion;
- Answered over 40.4 million calls, a 21% increase, because of a large 
number of taxpayer inquiries about the economic stimulus checks;
- Completed 52 million automated calls, an increase of over 123%;
- Maintained Account and Tax Law Accuracy rates of over 90%;
- Expanded partnerships with nonprofit and community organizations, 
offering approximately 12,000 free tax preparation sites nationwide. 
Volunteers at these sites prepared 3.5 million returns for low-income 
and elderly taxpayers, an increase of 33%; and; 
- Expanded return preparation at the IRS Taxpayer Assistance Centers 
preparing over 575,000 returns, a 42% increase over last year.
* Processed over 116.2 million Economic Stimulus Payments, distributing 
$94.3 billion dollars. Provided free help preparing the 1040A for 
people who were filing solely to receive their stimulus payment at 
approximately 320 IRS offices on Super Saturday, March 29, 2008.
* Developed Telephone Excise Tax Refund insert for individual income 
tax packages for TY 2007, to advise eligible taxpayers who did not 
claim a refund on their original TY 2006 returns to file amended 
returns. 

Actions Planned or Underway for FY 2009 and Beyond: 

* Ensure 2009 filing season readiness through executive oversight.
* Ensure that legislative provisions are accurately reflected in filing 
season forms and publications.
* Provide an online web application and automated telephone service to 
allow taxpayers to research the amount of Economic Stimulus Payment 
received in 2008 for use in completing their TY 2008 tax returns.
* Reduce the size and age of adjustment inventories before the filing 
season. 

Using Performance and Financial Information for Program and Budget 
Decisions: 

Challenge/Issue: The absence of accurate and complete management 
information hinders the IRS’s ability to produce timely, accurate and 
useful information needed for day-today decisions. 
Actions Taken: 
* Deployed CDDB Release 3 in January 2008, adding pre-posted revenue 
receipt transactions classified as “other” such as federal tax 
deposits, lockbox, integrated submission and remittance processing. It 
also created a refund transactions subsidiary ledger.
* Finalized the business compatibility definitions for the first two 
releases of Redesign Revenue Accounting Control System (RRACS). RRACS 
is an initiative that provides new functionality to address GAO 
material weaknesses, reduce the risk of failure to sustain future clean 
audit opinions, and streamline financial reporting. It also 
incorporates the United States standard general ledger (US SGL) as 
required by the Core Financial Systems Requirements of the Federal 
Financial Management System Requirements (FFMSR)/Joint Financial 
Management Improvement Act of 1996 (FFMIA).
- Completed Release 1 business requirements March 2008.
- Completed Project Charter, Project Management Plan, and Tailoring Plan
(Milestone 1 August 2008).
- Complete of the Business System Architecture Report, System Deployment
Plan, and Business Systems Concept Report (Milestone 2 November 2008).
* Used detailed allocation methodology to provide full cost accounting 
to the five operating business units and three complete years of fully 
allocated cost data in Integrated Financial System (IFS).
* Produced the Statement of Net Cost from the IFS Cost Accounting 
Module.
* Developed and provided a full cost Return On Investment (ROI) 
calculation for the EITC program that was a key factor in enabling EITC 
to reduce the FMFIA Material Weakness. 

Actions Planned or Underway for FY 2009 and Beyond: 

* Use CDDB to audit revenue and refunds in the FY 2009 audit.
* Expand use of CDDB for pre-posted revenue receipts using TRACE ID 
numbers.
* Complete the Business System Architecture Report, System Deployment 
Plan, and Business Systems Concept Report (Release 1, Milestone 2) for 
RRACS.
* Complete preliminary design of RRACS Release 1.
* Complete Detailed Design for RRACS Release 1.
* Begin system development and testing for RRACS Release 1.
* Continue use of managerial cost accounting system for cost analysis 
and cost estimation. 

[End of Appendix E] 

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 (OMB) Circular No. 
A-136, Financial Reporting Requirements, revised June 3, 2008. The 
responsibility for the integrity of the financial information included 
in these statements rests with the management of IRS. The audit of 
IRS's principal financial statements was performed by the Government 
Accountability Office (GAO). 

IRS's principal financial statements for fiscal years 2008 and 2007 are 
as follows: 

* The Balance Sheet presents the assets, liabilities and net position. 

* 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 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 non-exchange federal tax revenues collected. 

Internal Revenue Service: 
Balance Sheet: 
As of September 30, 2008 and 2007 (In Millions): 

Assets: 
2008: 
2007: 

Intragovernmental: Fund Balance with Treasury (Note 2); 
2008: $2,072; 
2007: $2,074. 

Intragovernmental: Due from Treasury (Note 6); 
2008: $3,064; 
2007: $1,675. 

Intragovernmental: Other Assets (Note 3); 
2008: $186; 
2007: $187. 

Total Intragovernmental; 
2008: $5,322; 
2007: $3,936. 

Assets: Cash and Other Monetary Assets (Note 4, 6); 
2008: $133; 
2007: $165. 

Assets: Federal Taxes Receivable, Net (Notes 5, 6); 
2008: $29,000; 
2007: $26,000. 

Assets: Property and Equipment, Net (Note 7); 
2008: $1,159
2007: $1,194 

Other Assets (Note 3); 
2008: $17; 
2007: $14. 

Total Assets; 
2008: $35,631;
2007: $31,309. 

Liabilities: Intragovernmental: Due to Treasury (Note 5); 	
2008: $29,000; 
2007: $26,000. 

Liabilities: Intragovernmental: Other Liabilities (Note 8); 
2008: $197; 
2007: $176. 

Liabilities: Total Intragovernmental; 
2008: $29,197; 
2007: $26,176. 

Liabilities: Federal Tax Refunds Payable; 	
2008: $3,064; 
2007: $1,675. 

Other Liabilities (Notes 8, 9); 
2008: $1,685; 
2007: $1,692. 

Total Liabilities; 
2008: $33,946; 
2007: $29,543. 

Net Position: Unexpended Appropriations; 
2008: $1,523; 
2007: $1,482. 

Net Position: Cumulative Results of Operations; 
2008: $162; 
2007: $284. 

Total Net Position; 
2008: $1,685; 
2007: $1,766. 

Total Liabilities and Net Position; 
2008: $35,631; 
2007: $31,309. 

The accompanying notes are an integral part of these statements. 

Internal Revenue Service: 
Statement of Net Cost: 
For the Years Ended September 30, 2008 and 2007 (In Millions): 

Program: Taxpayer Assistance and Education: Gross Cost; 
2008: $623; 
2007: $479. 

Program: Taxpayer Assistance and Education: Earned Revenue; 
2008: $(6);
2007: $(3). 

Program: Taxpayer Assistance and Education: Net Cost of Program; 
2008: $617; 
2007: $476. 

Program: Filing and Account Services: Gross Cost; 
2008: $3,602; 
2007: $3,640. 

Program: Filing and Account Services: Earned Revenue; 
2008: $(61); 
2007: $(43). 

Program: Filing and Account Services: Net Cost of Program; 
2008: $3,541; 
2007: $3,597. 

Program: Compliance: Gross Cost; 
2008: $8,136; 
2007: $7,702. 

Program: Compliance: Earned Revenue; 
2008: $(285); 
2007: $(231). 

Program: Compliance: Net Cost of Program; 
2008: $7,851; 
2007: $7,471. 

Program: Administration of Tax Credit Programs: Gross Cost; 
2008: $184; 
2007: $191. 

Program: Administration of Tax Credit Programs: Earned Revenue; 
2008: [Empty]; 
2007: [Empty]. 

Program: Administration of Tax Credit Programs: Net Cost of Program; 
2008: $184; 
2007: $191. 

Net Cost of Operations (Note 11); 
2008: $12,193; 
2007: $11,735. 

The accompanying notes are an integral part of these statements. 

Internal Revenue Service: 
Statement of Changes in Net Position: 
For the Years Ended September 30, 2008 and 2007 (In Millions): 
			
Beginning Balances; 
2008: Cumulative Results of Operations: $284; 
2008: Unexpended Appropriations: $1,482; 	
2007: Cumulative Results of Operations: $324; 
2007: Unexpended Appropriations: $1,575. 

Budgetary Financing Sources: Appropriations Received; 
2008: Cumulative Results of Operations: [Empty]; 
2008: Unexpended Appropriations: $11,095; 
2007: Cumulative Results of Operations: [Empty]; 
2007: Unexpended Appropriations: $10,597. 

Budgetary Financing Sources: Appropriations Transferred In/Out; 
2008: Cumulative Results of Operations: [Empty]; 
2008: Unexpended Appropriations: $18; 
2007: Cumulative Results of Operations: [Empty]; 
2007: Unexpended Appropriations: $4. 

Budgetary Financing Sources: Other Adjustments; 
2008: Cumulative Results of Operations: [Empty]; 
2008: Unexpended Appropriations: (68); 
2007: Cumulative Results of Operations: [Empty]; 
2007: Unexpended Appropriations: (73). 

Budgetary Financing Sources: Appropriations Used; 
2008: Cumulative Results of Operations: 11,004; 
2008: Unexpended Appropriations: (11,004); 
2007: Cumulative Results of Operations: 10,621; 
2007: Unexpended Appropriations: (10,621). 

Budgetary Financing Sources: Transfers In Without Reimbursement - 
Earmarked Funds; 
2008: Cumulative Results of Operations: $13; 
2008: Unexpended Appropriations: [Empty]; 
2007: Cumulative Results of Operations: $11; 
2007: Unexpended Appropriations: [Empty]. 

Other Financing Sources: Imputed Financing; 
2008: Cumulative Results of Operations: $1,067
2008: Unexpended Appropriations: [Empty]; 
2007: Cumulative Results of Operations: $1,094
2007: Unexpended Appropriations: [Empty]. 

Other Financing Sources: Transfers In Without Reimbursement; 
2008: Cumulative Results of Operations: $30; 
2008: Unexpended Appropriations: [Empty]; 
2007: Cumulative Results of Operations: $13; 
2007: Unexpended Appropriations: [Empty]. 

Other Financing Sources: Transfers to General Fund; 
2008: Cumulative Results of Operations: (43); 
2008: Unexpended Appropriations: [Empty]; 
2007: Cumulative Results of Operations: (44); 
2007: Unexpended Appropriations: [Empty]. 

Total Financing Sources; 
2008: Cumulative Results of Operations: 12,071; 
2008: Unexpended Appropriations: $41; 
2007: Cumulative Results of Operations: $11,695
2007: Unexpended Appropriations: (93). 

Net Cost of Operations; 			
2008: Cumulative Results of Operations: (12,193); 
2008: Unexpended Appropriations: [Empty]; 
2007: Cumulative Results of Operations: (11,735); 
2007: Unexpended Appropriations: [Empty]. 

Net Change; 
2008: Cumulative Results of Operations: (12); 
2008: Unexpended Appropriations: $41; 
2007: Cumulative Results of Operations: (40); 
2007: Unexpended Appropriations: (93). 

Ending Balances; 	
2008: Cumulative Results of Operations: $162; 
2008: Unexpended Appropriations: $1,523; 
2007: Cumulative Results of Operations: $284; 
2007: Unexpended Appropriations: $1,482. 

The accompanying notes are an integral part of these statements. 

Internal Revenue Service: 
Statement of Budgetary Resources: 
For the Years Ended September 30, 2008 and 2007 (In Millions): 

Budgetary Resources: Unobligated Balance, Brought Forward, October 1; 
2008: $664; 
2007: $552. 

Budgetary Resources: Recoveries of Prior Year Unpaid Obligations; 
2008: $106; 
2007: $183. 

Budgetary Resources: Budget Authority: Appropriations; 
2008: $11,296; 
2007: $10,776. 

Budgetary Resources: Budget Authority: Spending Authority from 
Offsetting Collections; 
2008: $158; 
2007: $119. 

Budgetary Resources: Nonexpenditure Transfers, Net; 
2008: $18; 
2007: $4. 

Budgetary Resources: Permanently Not Available; 
2008: (68); 
2007: (73). 

Total Budgetary Resources; 
2008: $12,174; 
2007: $11,561. 

Status of Budgetary Resources: Obligations Incurred; 
2008: $11,484; 
2007: $10,897. 

Status of Budgetary Resources: Unobligated Balance – Available (Note 
2); 
2008: $224; 
2007: $171. 

Status of Budgetary Resources: Unobligated Balance – Not Available 
(Note 2); 
2008: $466; 
2007: $493. 

Total Status of Budgetary Resources; 
2008: $12,174
2007: $11,561 

Change in Obligated Balance: Obligated Balance, Net, Brought Forward, 
October 1; 
2008: $1,427; 
2007: $1,522. 

Change in Obligated Balance: Obligations Incurred; 
2008: $11,484; 
2007: $10,897. 

Change in Obligated Balance: Gross Outlays; 
2008: (11,388); 
2007: (10,800). 

Change in Obligated Balance: Recoveries of Prior Year Unpaid 
Obligations, Actual; 
2008: (106)
2007: (183) 

Change in Obligated Balance: Change in Uncollected Customer Payments 
from Federal Sources; 
2008: (23); 
2007: (9). 

Obligated Balance, Net, End of Period; 
2008: $1,394; 
2007: $1,427. 

Net Outlays: Gross Outlays; 
2008: $11,388; 
2007: $10,800. 

Net Outlays: Offsetting Collections; 
2008: (136); 
2007: (110). 

Net Outlays: Distributed Offsetting Receipts; 
2008: (201); 
2007: (164). 

Net Outlays; 
2008: $11,051; 
2007: $10,526. 

The accompanying notes are an integral part of these statements. 

Internal Revenue Service: 
Statement of Custodial Activity: 
For the Years Ended September 30, 2008 and 2007 (In Billions): 

Revenue Activity: Collections of Federal Tax Revenue (Note 13): 
Individual Income, FICA/SECA, and Other; 
2008: $2,295; 
2007: $2,202. 

Revenue Activity: Collections of Federal Tax Revenue (Note 13): 
Corporate Income; 
2008: $354; 
2007: $395. 

Revenue Activity: Collections of Federal Tax Revenue (Note 13): Excise; 
2008: $52; 
2007: $53. 

Revenue Activity: Collections of Federal Tax Revenue (Note 13): Estate 
and Gift; 
2008: $30; 
2007: $27. 

Revenue Activity: Collections of Federal Tax Revenue (Note 13): 
Railroad Retirement; 
2008: $5; 
2007: $5. 

Revenue Activity: Collections of Federal Tax Revenue (Note 13): Federal 
Unemployment; 
2008: $7; 
2007: $7. 

Revenue Activity: Total Collections of Federal Tax Revenue; 
2008: $2,743; 
2007: $2,689. 

Revenue Activity: Increase in Federal Taxes Receivable, Net; 
2008: $3; 
2007: $5. 

Revenue Activity: Total Federal Tax Revenue; 
2008: $2,746; 
2007: $2,694. 

Distribution of Federal Tax Revenue to Treasury; 
2008: $2,743; 
2007: $2,689. 

Increase in Amount Due to Treasury; 
2008: $3; 
2007: $5. 

Total Disposition of Federal Tax Revenue: 
2008: $2,746; 
2007: $2,694. 

Net Federal Revenue Activity: 
2008: [Empty]; 
2007: [Empty]. 

Federal Tax Refund Activity: Total Refunds of Federal Taxes (Note 14); 
2008: $426; 
2007: $292. 

Federal Tax Refund Activity: Appropriations Used for Refund of Federal 
Taxes; 
2008: (426); 
2007: 292). 

Net Federal Tax Refund Activity; 
2008: [Empty]; 
2007: [Empty]. 

The accompanying notes are an integral part of these statements. 

Internal Revenue Service: 
Notes to the Financial Statements: 
For the Years Ended September 30, 2008 and 2007: 

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 collect 96 percent of 
the revenues funding the Federal government. 

Organizations: 
* Operating Divisions; 
* Functional Divisions; 
* National Headquarters; 
* 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, subchapter S corporations, and 
partnerships with assets greater than $10 million. 

The functional 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 
* Administration of 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, Financial Reporting Requirements, 
revised June 3, 2008. Accounting principles generally accepted for 
Federal entities are the standards prescribed by the Federal Accounting 
Standards Advisory Board (FASAB), which is the official body for setting
accounting standards 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. 

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 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, established in accordance with Title 26
United States Code, Section 7810, is used to redeem real property 
foreclosed upon by a holder of a lien. The IRS may sell the property; 
reimburse the revolving fund in an amount equal to the redemption; 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 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 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. 
Abatements 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. 

* 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: 

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 was 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 final acceptance 
and testing are successfully completed. When the software is completed 
and placed into service, 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. 

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 returns accurately. 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 is 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 to IRS, but rather a 
cost to the Federal 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 Federal Tax Lien Revolving Fund (20X4413) 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 (20X5510) was established under 
the American Jobs Creation Act of 2004. IRS has been authorized 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. 

M. Allocation Transfers: 

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. Employee Compensation and Benefits: 

Accrued Annual, Sick, and Other Leave: 

Annual and compensatory leave is expensed with an offsetting liability 
as it is earned and the liability is reduced as leave is taken. Each 
year, the balance in the accrued annual leave liability account is 
adjusted to reflect current pay rates. To the extent current or prior 
year appropriations are not available to fund annual and compensatory 
leave earned but not taken, funding will be obtained from future 
financing sources. Sick leave and other types of non-vested leave are 
expensed as taken. 

Federal Employees Compensation Act: 

The Federal Employees Compensation Act (FECA) provides income and 
medical cost protection to covered federal civilian employees injured 
on the job, to employees who have incurred work-related occupational 
diseases, and to beneficiaries of employees whose deaths are 
attributable to job-related injuries or occupational diseases. The FECA 
program is administered by the U.S. Department of Labor (DOL), which 
pays valid claims and subsequently seeks reimbursement for claims paid. 
Accrued FECA liability represents amounts due to DOL for claims paid on 
behalf of IRS. Actuarial FECA liability represents the liability for 
future workers’ compensation benefits, which includes the expected 
liability for death, disability, medical, and miscellaneous costs for 
approved cases. DOL estimates the liability for future payments as a 
result of past events. 

Employee Pension Benefits: 

IRS employees participated in the Civil Service Retirement System 
(CSRS) or the Federal Employees Retirement System (FERS). For employees 
covered by CSRS, the IRS contributes 7% of the employees’ gross pay for 
regular and 7.5% for law enforcement officers’ retirement. For employees
covered by FERS, the IRS contributes 11.2% of employees’ gross pay for 
regular and 24.9% for law enforcement officers’ retirement. 

Employees covered by CSRS and FERS are eligible to contribute to a 
Thrift Savings Plan (TSP). For those employees participating in the 
FERS, a TSP account is automatically established, and IRS makes a 
mandatory contribution to this plan equal to one percent of the 
employees’ compensation as well as matching contributions ranging from 
one to four percent of the employees’ compensation for FERS-eligible
employees who contribute to their TSP. No matching contributions are 
made to the TSP for employees participating in the CSRS. 

Employee Health and Life Insurance Benefits: 

Employees are eligible to participate in the Federal Employees Health 
Benefit Program (FEHB) and Federal Employees Group Life Insurance 
Program (FEGLI). Employees participating in the FEGLI program can 
obtain basic term life insurance, with the employee paying two-thirds 
of the cost and IRS paying one-third. Additional coverage is optional, 
to be paid fully by the employee. The basic life coverage may be 
continued into retirement if certain requirements are met. IRS 
recognizes the full cost of providing these benefits. 

O. Use of Estimates: 

The preparation of financial statements in conformity with accounting 
principles generally accepted in the United States of America requires 
management to make estimates and assumptions related to the reporting 
of assets, liabilities, revenues, and expenses and the disclosure of 
contingent liabilities. Actual results could differ from those 
estimates. 

P. Reclassifications: 

Certain prior year amounts have been reclassified to conform to current 
year presentation in the disclosures. 

Note 2. Fund Balance with Treasury (In Millions): 

General Funds: 
2008: $1,986; 
2007: $1,937. 

Special Funds: 
2008: $82; 
2007: $136. 

Revolving Funds: 
2008: $5; 
2007: $6. 

Other Funds: 
2008: ($1); 
2007: ($5). 

Fund Balance with Treasury: 
2008: $2,072; 
2007: $2,074. 

Unobligated balances: Available: 
2008: $224; 
2007: $171. 

Unobligated balances: Unavailable: 
2008: $466; 
2007: $493. 

Obligated Balance not yet disbursed: 
2008: $1,394; 
2007: $1,427. 

Non-Budgetary FBWT: 
2008: ($12); 
2007: ($17). 

Status of Fund Balance with Treasury: 
2008: $2,072; 
2007: $2,074. 

Note 3. Other Assets (In Millions): 

Advances: 
2008: Intragovernmental: $137; 
2008: With the Public: $9; 
2007: Intragovernmental: $162; 
2007: With the Public: $8. 

Accounts receivable, net: 
2008: Intragovernmental: $45; 
2008: With the Public: $5; 
2007: Intragovernmental: $17; 
2007: With the Public: $7. 

Forfeited property held for sale: 
2008: Intragovernmental: [Empty]; 
2008: With the Public: $3; 
2007: Intragovernmental: [Empty]; 
2007: With the Public: $2. 

Clearing accounts: 
2008: Intragovernmental: $4; 
2008: With the Public: [Empty]; 
2007: Intragovernmental: $8; 
2007: With the Public: ($3). 

Other Assets: 
2008: Intragovernmental: $186; 
2008: With the Public: $17; 
2007: Intragovernmental: $187; 
2007: With the Public: $14. 

Note 4. Cash and Other Monetary Assets (In Millions): 

Imprest Fund: 
2008: $4; 
2007: $4. 

Other monetary assets: 
2008: $129; 
2007: $161. 

Cash and Other Monetary Assets: 
2008: $133; 
2007: $165. 

Note 5. Federal Taxes Receivable, Net and Due to Treasury (In 
Billions): 

Federal taxes receivable: 
2008: $112; 
2007: $98. 

Allowance for uncollectible taxes receivable: 
2008: ($83); 
2007: ($72). 

Federal taxes receivable, net and Due to Treasury: 
2008: $29; 
2007: $26. 

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 uncollectible taxes receivable 
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 (In Millions): 

Due from Treasury: 
2008: Intragovernmental: $3,064; 
2008: With the Public: [Empty]; 
2007: Intragovernmental: $1,675; 
2007: With the Public: [Empty]. 

Federal taxes receivable, net: 
2008: Intragovernmental: [Empty]; 
2008: With the Public: $29,000; 
2007: Intragovernmental: [Empty]; 
2007: With the Public: $26,000. 

Other monetary assets: 
2008: Intragovernmental: [Empty]; 
2008: With the Public: $129; 
2007: Intragovernmental: [Empty]; 
2007: With the Public: $161. 

Non-entity Assets: 
2008: Intragovernmental: $3,064; 
2008: With the Public: $29,129; 
2007: Intragovernmental: $1,675; 
2007: With the Public: $26,161. 

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. 

Note 7. Property and Equipment (In Millions): 

ADP assets: 
Useful Life (Years): 3 to 7; 
Cost: $1,842; 
Accumulated Depreciation: ($1,422); 
2008 Net Book Value: $420; 
2007 Net Book Value: $441. 

Internal use software: 
Useful Life (Years): 7 to 17; 
Cost: $795; 
Accumulated Depreciation: ($432); 
2008 Net Book Value: $363; 
2007 Net Book Value: $438. 

Leasehold improvements: 
Useful Life (Years): 10; 
Cost: $509; 
Accumulated Depreciation: ($356); 
2008 Net Book Value: $153; 
2007 Net Book Value: $165. 

Major systems: 
Useful Life (Years): 7; 
Cost: $422; 
Accumulated Depreciation: ($422); 
2008 Net Book Value: [Empty]; 
2007 Net Book Value: $2. 

Internal use software – work in process: 
Useful Life (Years): [Empty]; 
Cost: $172; 
Accumulated Depreciation: [Empty]; 
2008 Net Book Value: $172; 
2007 Net Book Value: $99. 

Vehicles: 
Useful Life (Years): 5; 
Cost: $85; 
Accumulated Depreciation: ($55); 
2008 Net Book Value: $30; 
2007 Net Book Value: $27. 

Furniture and non-ADP equipment: 
Useful Life (Years): 8 to 10; 
Cost: $67; 
Accumulated Depreciation: ($54); 
2008 Net Book Value: $13; 
2007 Net Book Value: $12. 

Assets under capital lease: 
Useful Life (Years): 4 to 10
Cost: $24; 
Accumulated Depreciation: ($17); 
2008 Net Book Value: $7; 
2007 Net Book Value: $9. 

Investigative equipment: 
Useful Life (Years): 10; 
Cost: $8; 
Accumulated Depreciation: ($7); 
2008 Net Book Value: $1; 
2007 Net Book Value: $1. 

Total, Property and Equipment: 
Cost: $3,924; 
Accumulated Depreciation: $(2,765); 
2008 Net Book Value: $1,159; 
2007 Net Book Value: $1,194 . 

The Cost column represents the historical cost of property and 
equipment, net of disposals. The cost basis for FY 2008 and FY 2007 is 
$3,924 million and $3,721 million, respectively. Accumulated 
depreciation for FY 2008 and FY 2007 is $2,765 million and $2,527 
million, respectively. 

The IRS has 11 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) is an infrastructure system 
allowing remote monitoring and network management. 

* Security and Technology Infrastructure Release (STIR) is the 
infrastructure for information technology security. 

* 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. 

* The Custodial Detail Database (CDDB) provides the functionality 
needed for custodial financial management reporting. 

In fiscal year 2008 due to funding issues, Correspondence Examination 
Automation Support (CEAS) and Examination Desktop Support System (EDSS) 
were terminated. In fiscal year 2007, these projects were in work in 
process. The accumulated costs have been recognized as a loss on 
disposal in fiscal year 2008. 

Deployed Internal Use Software (In Millions): 

Modernized E-File: 
Cost: $183; 
Accumulated Depreciation: ($87); 
2008 Net Book Value: $96; 
2007 Net Book Value: $103. 

CADE: 
Cost: $148; 
Accumulated Depreciation: ($53); 
2008 Net Book Value: $95; 
2007 Net Book Value: $101. 

Integrated Financial System: 
Cost: $147; 
Accumulated Depreciation: ($74); 
2008 Net Book Value: $73; 
2007 Net Book Value: $95. 

E-Services: 
Cost: $141; 
Accumulated Depreciation: ($90); 
2008 Net Book Value: $51; 
2007 Net Book Value: $70. 

STIR: 
Cost: $76; 
Accumulated Depreciation: ($60); 
2008 Net Book Value: $16; 
2007 Net Book Value: $27. 

Filing & Payment Compliance: 
Cost: $28; 
Accumulated Depreciation: ($7); 
2008 Net Book Value: $21; 
2007 Net Book Value: $25. 

Customer Communications: 
Cost: $25; 
Accumulated Depreciation: ($25); 
2008 Net Book Value: [Empty]; 
2007 Net Book Value: $3. 

Enterprise Systems Management: 
Cost: $16; 
Accumulated Depreciation: ($13); 
2008 Net Book Value: $3; 
2007 Net Book Value: $6. 

Internet Refund Fact of Filing: 
Cost: $15; 
Accumulated Depreciation: ($12); 
2008 Net Book Value: $3; 
2007 Net Book Value: $6. 

Other: 
Cost: $16; 
Accumulated Depreciation: ($11); 
2008 Net Book Value: $5; 
2007 Net Book Value: $2. 

Total, Deployed Internal Use Software: 
Cost: $795; 
Accumulated Depreciation: ($432); 
2008 Net Book Value: $363; 
2007 Net Book Value: $438. 

Work in Process Internal Use Software (In Millions): 

CADE: 
2008: $108
2007: $57. 

AMS: 
2008: $48; 
2007:$23. 

Modernized E File: 
2008: $14; 
2007: $7. 

CDDB: 
2008: $2; 
2007: $2. 

EDSS: 
2008: [Empty]; 
2007: $6. 

CEAS: 
2008: [Empty]; 
2007: $4. 

Total, Work in Process Internal Use Software: 
2008: $172; 
2007: $99. 

Note 8. Liabilities: 

Other Liabilities (In Millions): 

Intragovernmental: Accrued payroll and benefits: 
2008 Current: $67; 
2008 Non-Current: [Empty]; 
2008 Total: $67. 

Intragovernmental: Accrued FECA liability: 
2008 Current: $42; 
2008 Non-Current: $55; 
2008 Total: $97. 

Intragovernmental: Accrued expense: 
2008 Current: $33; 
2008 Non-Current: [Empty]; 
2008 Total: $33. 

Total, Intragovernmental: Other Liabilities: 
2008 Current: $142; 
2008 Non-Current: $55; 
2008 Total: $197. 

With the Public: Accrued annual leave: 
2008 Current: $506; 
2008 Non-Current: [Empty]; 
2008 Total: $506. 

With the Public: Actuarial FECA liability: 
2008 Current: [Empty]; 
2008 Non-Current: $481; 
2008 Total: $481. 

With the Public: Accrued payroll and benefits: 
2008 Current: $290; 
2008 Non-Current: [Empty]; 
2008 Total: $290. 

With the Public: Accrued expenses: 
2008 Current: $221; 
2008 Non-Current: [Empty]; 
2008 Total: $221. 

With the Public: Liability for Deposit Funds and Clearing
Accounts: 
2008 Current: $132; 
2008 Non-Current: [Empty]; 
2008 Total: $132. 

With the Public: Accounts payables: 
2008 Current: $52; 
2008 Non-Current: [Empty]; 
2008 Total: $52. 

With the Public: Net capital lease liability (Note 9): 
2008 Current: $3; 
2008 Non-Current: [Empty]; 
2008 Total: $3. 

Total, With the Public: Other Liabilities: 
2008 Current: $1,204; 
2008 Non-Current: $481; 
2008 Total: $1,685. 

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: Accrued expense: 
2007 Current: $23; 
2007 Non-Current: [Empty]; 
2007 Total: $23. 

Total, Intragovernmental: Other Liabilities: 
2007 Current: $121; 
2007 Non-Current: $55; 
2007 Total: $176. 

With the Public: Accrued annual leave: 
2007 Current: $480; 
2007 Non-Current: [Empty]; 
2007 Total: $480. 

With the Public: Actuarial FECA liability: 
2007 Current: [Empty]; 
2007 Non-Current: $465; 
2007 Total: $465. 

With the Public: Accrued payroll and benefits: 
2007 Current: $281; 
2007 Non-Current: [Empty]; 
2007 Total: $281. 

With the Public: Accrued expenses: 
2007 Current: $208; 
2007 Non-Current: [Empty]; 
2007 Total: $208. 

With the Public: Liability for Deposit Funds and Clearing
Accounts: 
2007 Current: $161; 
2007 Non-Current: [Empty]; 
2007 Total: $161. 

With the Public: Accounts payables: 
2007 Current: $86; 
2007 Non-Current: [Empty]; 
2007 Total: $86. 

With the Public: Net capital lease liability (Note 9): 
2007 Current: [Empty]; 
2007 Non-Current: $3; 
2007 Total: $3. 

Total, With the Public: Other Liabilities: 
2007 Current: $1,224; 
2007 Non-Current: $468; 
2007 Total: $1,692. 

Liabilities Not Covered by Budgetary Resources (In Millions): 

Actuarial FECA liability: 
2008: Intragovernmental: [Empty]; 
2008: With the Public: $481; 
2007: Intragovernmental: [Empty]; 
2007: With the Public: $465. 

Accrued annual leave: 
2008: Intragovernmental: [Empty]; 
2008: With the Public: $506; 
2007: Intragovernmental: [Empty]; 
2007: With the Public: $480. 

Accrued FECA liability: 
2008: Intragovernmental: $97; 
2008: With the Public: [Empty]; 
2007: Intragovernmental: $98; 
2007: With the Public: [Empty]. 

Installment agreement liability: 
2008: Intragovernmental: [Empty]; 
2008: With the Public: [Empty]; 
2007: Intragovernmental: [Empty]; 
2007: With the Public: $8. 

Total, Liabilities Not Covered by Budgetary Resources: 
2008: Intragovernmental: $97; 
2008: With the Public: $987; 
2007: Intragovernmental: $98; 
2007: With the Public: $953. 

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. 

Note 9. Leases: 

Capital Leases: 

The net capital lease liability was $3 million as of September 30, 2008 
and 2007. The lease for the ADP equipment is covered by budgetary 
resources. The future lease payment due in fiscal year 2009 is the 
final payment. 

Operating Leases (In Millions): 

Fiscal Year: 2009; 
Lease Payment: $9. 

Fiscal Year: 2010; 
Lease Payment: $9. 

Fiscal Year: 2011; 
Lease Payment: $10. 

Fiscal Year: 2012; 
Lease Payment: $8. 

Fiscal Year: 2013; 
Lease Payment: $4. 

Fiscal Year: After 2013; 
Lease Payment: [Empty]. 

Total Future Lease Payments: $40. 

The IRS leases office space from commercial entities under five year 
non-cancelable operating leases. Future lease payments under non-
cancelable leases of office spaces are presented above. 

Additionally, the IRS has annual operating leases with the General 
Services Administration for office space and vehicles and with 
commercial entities for equipment. 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. 

Note 10. Commitments and Contingencies: 

The IRS is a party to legal actions whose outcome, if unfavorable, 
could materially affect the financial statements. For some of these 
actions, management and legal counsel have determined the likelihood of
unfavorable outcome is remote. As of September 30, 2008 and 2007, there 
were no estimated contingent liabilities arising from these actions. 

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. The IRS does not 
accrue for possible losses related to cases where the potential loss 
cannot be estimated or the likelihood of an unfavorable outcome is less 
than probable. As of September 30, 2008 and 2007, there were three 
cases and two 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, 2008 and 2007, 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: 
2008 Taxpayer Assistance and Education: $119; 
2008 Filing and Account Services: $1,494; 
2008 Compliance: $2,456; 
2008 Administration of Tax Credit Programs: $41; 
2008 Total: $4,110. 

Gross Costs with the Public: 
2008 Taxpayer Assistance and Education: $504; 
2008 Filing and Account Services: $2,108; 
2008 Compliance: $5,680; 
2008 Administration of Tax Credit Programs: $143; 
2008 Total: $8,435. 

Program Costs: 
2008 Taxpayer Assistance and Education: $623; 
2008 Filing and Account Services: $3,602; 
2008 Compliance: $8,136; 
2008 Administration of Tax Credit Programs: $184; 
2008 Total: $12,545. 

Intragovernmental Earned Revenue: 
2008 Taxpayer Assistance and Education: ($3); 
2008 Filing and Account Services: ($15); 
2008 Compliance: ($53); 
2008 Administration of Tax Credit Programs: [Empty]; 
2008 Total: ($71). 

Earned Revenue from the Public: 
2008 Taxpayer Assistance and Education: ($3); 
2008 Filing and Account Services: ($46); 
2008 Compliance: ($232); 
2008 Administration of Tax Credit Programs: [Empty]; 
2008 Total: ($281). 

Program Revenues: 
2008 Taxpayer Assistance and Education: ($6); 
2008 Filing and Account Services: ($61); 
2008 Compliance: ($285); 
2008 Administration of Tax Credit Programs: [Empty]; 
2008 Total: ($352). 

Net Cost of Operations: 
2008 Taxpayer Assistance and Education: $617; 
2008 Filing and Account Services: $3,541; 
2008 Compliance: $7,851; 
2008 Administration of Tax Credit Programs: $184; 
2008 Total: $12,193. 

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: $1503; 
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 Revenues: 
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. 

Note 12. Statement of Budgetary Resources: 

Obligations Incurred (In Millions): 

Direct - Category B: 
2008: $11,342; 
2007: $10,808. 

Reimbursable - Category B: 
2008: $142; 
2007: $89. 

Total, Obligations Incurred: 
2008: $11,484; 
2007: $10,897. 

Category B apportionments distribute budgetary resources by activities 
or programs and are restricted by purpose for which obligations can be 
incurred. 

Explanation of Differences Between the of Statement of Budgetary 
Resources and the President’s Budget (In Millions): 

Statement of Budgetary Resources (SBR): 
Budgetary Resources: $11,561; 
Obligations Incurred: $10,897; 
Distributed Offsetting Receipts: $164; 
Net Outlays: $10,526. 

Included on SBR, not in President’s Budget: Expired Funds: 
Budgetary Resources: ($383); 
Obligations Incurred: ($26); 
Distributed Offsetting Receipts: [Empty]; 
Net Outlays: [Empty]. 

Included on SBR, not in President’s Budget: IRS Miscellaneous Retained 
Fees: 
Budgetary Resources: ($129); 
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: ($164); 
Net Outlays: $164. 

Included on SBR, not in President’s Budget: Other: 
Budgetary Resources: $2; 
Obligations Incurred: $1; 
Distributed Offsetting Receipts: [Empty]; 
Net Outlays: $5. 

Included in President’s Budget, not on SBR: Tax credits and interest 
refunds to taxpayers: 
Budgetary Resources: $57,817; 
Obligations Incurred: $57,817; 
Distributed Offsetting Receipts: [Empty]; 
Net Outlays: $57,817. 

Payments to informants: 
Budgetary Resources: $13; 
Obligations Incurred: $13; 
Distributed Offsetting Receipts: [Empty]; 
Net Outlays: $13. 

Budget of the United States Government: 
Budgetary Resources: $68,881
Obligations Incurred: $68,702
Distributed Offsetting Receipts: [Empty]; 
Net Outlays: $68,525. 

The FY 2010 Budget of the United States Government (President’s Budget) 
presenting the actual amounts for the year ended September 30, 2008 has 
not been published as of the issue date of these financial statements. 
The FY 2010 President’s Budget is scheduled for publication in February 
2009. A reconciliation of the FY 2007 column on the Statement of 
Budgetary Resources (SBR) to the actual amounts for FY 2007 in the FY 
2009 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 $58 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. 

Undelivered Orders at the End of Period: 

Undelivered orders are the value of goods and services ordered and 
obligated which have not been received. This amount includes any orders 
which may have been prepaid or advanced but for which delivery or 
performance has not yet occurred. Undelivered orders were $917 million 
and $960 million for the periods ended September 30, 2008 and 2007, 
respectively. 

Note 13. Collections of Federal Tax Revenue (In Billions): 

Individual income, FICA/SECA, and other: 
Tax Year: 2008: $1,455[A]; 
Tax Year: 2007: $799; 
Tax Year: 2006: $24; 
Tax Year: Prior Years: $17; 
Collections Received FY 2008: $2,295; 
Collections Received FY 2007: $2,202. 

Corporate income: 
Tax Year: 2008: 222[B]; 
Tax Year: 2007: $144; 
Tax Year: 2006: $2; 
Tax Year: Prior Years: $16; 
Collections Received FY 2008: $354; 
Collections Received FY 2007: $395. 

Excise: 
Tax Year: 2008: $38; 
Tax Year: 2007: $14; 
Tax Year: 2006: [Empty]; 
Tax Year: Prior Years: [Empty]; 
Collections Received FY 2008: $52; 
Collections Received FY 2007: $53. 

Estate and gift: 
Tax Year: 2008: [Empty]; 
Tax Year: 2007: $19; 
Tax Year: 2006: $1; 
Tax Year: Prior Years: $10; 
Collections Received FY 2008: $30; 
Collections Received FY 2007: $27. 

Railroad retirement: 
Tax Year: 2008: $4; 
Tax Year: 2007: $1; 
Tax Year: 2006: [Empty]; 
Tax Year: Prior Years: [Empty]; 
Collections Received FY 2008: $5; 
Collections Received FY 2007: $5. 

Federal unemployment: 
Tax Year: 2008: $5; 
Tax Year: 2007: $2; 
Tax Year: 2006: [Empty]; 
Tax Year: Prior Years: [Empty]; 
Collections Received FY 2008: $7; 
Collections Received FY 2007: $7. 

Total, Collections of Federal Tax Revenue: 
Tax Year: 2008: $1,724
Tax Year: 2007: $949
Tax Year: 2006: $27 
Tax Year: Prior Years: $43 
Collections Received FY 2008: $2,743 
Collections Received FY 2007: $2,689 

[A] Includes other collections of $329 million. 

[B] Includes tax year 2009 corporate income tax receipts of $10 
billion. 

In FY 2008, individual income, FICA/SECA, and other taxes include $79 
billion in payroll taxes collected from other Federal agencies. 

Note 14. Federal Tax Refund Activity (In Billions): 

Individual income, FICA/SECA, and other: 
Tax Year: 2008: $1; 
Tax Year: 2007: $342; 
Tax Year: 2006: $19; 
Prior Years: $7; 
Refunds Disbursed FY 2008: $369; 
Refunds Disbursed FY 2007: $261. 

Corporate income: 
Tax Year: 2008: $2; 
Tax Year: 2007: $20; 
Tax Year: 2006: $10; 
Prior Years: $23; 
Refunds Disbursed FY 2008: $55; 
Refunds Disbursed FY 2007: $28. 

Excise: 
Tax Year: 2008: [Empty]; 
Tax Year: 2007: $1; 
Tax Year: 2006: [Empty]; 
Prior Years: [Empty]; 
Refunds Disbursed FY 2008: $1; 
Refunds Disbursed FY 2007: $2. 

Estate and gift: 
Tax Year: 2008: [Empty]; 
Tax Year: 2007: [Empty]; 
Tax Year: 2006: $1; 
Prior Years: [Empty]; 
Refunds Disbursed FY 2008: $1; 
Refunds Disbursed FY 2007: $1. 

Total, Federal Tax Refund Activity: 
Tax Year: 2008: $3; 
Tax Year: 2007: $363; 
Tax Year: 2006: $30; 
Prior Years: $30; 
Refunds Disbursed FY 2008: $426; 
Refunds Disbursed FY 2007: $292. 

Individual income, FICA/SECA, and other refund amounts include EITC, 
child tax credit and stimulus rebate payments. The Economic Stimulus 
Act of 2008, (P.L. 110-185), included provisions to help stimulate the 
economy through recovery rebates. In fiscal year 2008, the IRS 
disbursed $94.3 billion of tax refunds to eligible taxpayers of up to 
$600 for individuals and $1,200 for couples, with an additional $300 
for each child. 

Note 15. Reconciliation of Net Cost of Operations to Budget (In 
Millions): 

Resources used to finance activities: Obligations incurred: 
2008: $11,484; 
2007: $10,897. 

Resources used to finance activities: Spending authority from 
offsetting collections and recoveries: 
2008: ($264); 
2007: ($302). 

Resources used to finance activities: Distributed offsetting receipts: 
2008: ($201); 
2007: ($164). 

Resources used to finance activities: Other exchange revenues not in 
budget: 
2008: ($40); 
2007: ($40). 

Resources used to finance activities: Imputed financing: 
2008: $1,067; 
2007: $1,094. 

Resources used to finance activities: Transfers in/out without 
reimbursement: 
2008: $30; 
2007: $13. 

Total, Resources used to finance activities: 
2008: $12,076
2007: $11,498 

Resources that do not fund net cost of operations: Changes in goods, 
services and benefits ordered but not yet received or provided: 
2008: $40; 
2007: $167. 

Resources that do not fund net cost of operations: Costs capitalized on 
the balance sheet; 
2008: ($321); 
2007: ($292). 

Total, Resources that do not fund net cost of operations: 
2008: ($281); 
2007: ($125). 

Costs that do not require resources in current period: Depreciation and 
amortization: 
2008: $333; 
2007: $370. 

Costs that do not require resources in current period: Decrease in 
unfunded liabilities: 
2008: $41; 
2007: ($21). 

Costs that do not require resources in current period: Revaluation of 
assets and liabilities; 
2008: $22; 
2007: $9. 

Costs that do not require resources in current period: Other: 
2008: $2; 
2007: $4. 

Total, Costs that do not require resources in current period: 
2008: $398; 
2007: $362. 

Net Cost of Operations: 
2008: $12,193
2007: $11,735 

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. 

2008 Schedule of Budgetary Resources by Major Budget Accounts (In 
Millions): 

Budgetary Resources: Unobligated Balance, Brought Forward, October 1: 
Taxpayer Service: $183; 
Enforcement: $101; 
Operations Support: $134; 
Other Appropriations: $246; 
Total: $664. 

Budgetary Resources: Recoveries of Prior Year Unpaid Obligations: 
Taxpayer Service: $22; 
Enforcement: $21; 
Operations Support: $51; 
Other Appropriations: $12; 
Total: $106; 

Budgetary Resources: Budget Authority: Appropriations: 
Taxpayer Service: $2,201; 
Enforcement: $4,780; 
Operations Support: $3,832; 
Other Appropriations: $483; 
Total: $11,296. 

Budgetary Resources: Budget Authority: Spending Authority from 
Offsetting Collections: 
Taxpayer Service: $42; 
Enforcement: $61; 
Operations Support: $47; 
Other Appropriations: $8; 
Total: $158. 

Budgetary Resources: Nonexpenditure Transfers, Net: 
Taxpayer Service: $163; 
Enforcement: $6; 
Operations Support: $96; 
Other Appropriations: ($247); 
Total: $18. 

Budgetary Resources: Permanently Not Available: 
Taxpayer Service: ($34); 
Enforcement: ($17); 
Operations Support: ($16); 
Other Appropriations: ($1); 
Total: ($68). 

Total Budgetary Resources: 
Taxpayer Service: $2,577; 
Enforcement: $4,952; 
Operations Support: $4,144; 
Other Appropriations: $501; 
Total: $12,174. 

Status of Budgetary Resources: Obligations Incurred: 
Taxpayer Service: $2,396;
Enforcement: $4,852; 
Operations Support: $3,960; 
Other Appropriations: $276; 
Total: $11,484. 

Status of Budgetary Resources: Unobligated Balance – Available: 
Taxpayer Service: $23; 
Enforcement: $13; 
Operations Support: $74; 
Other Appropriations: $114; 
Total: $224. 

Status of Budgetary Resources: Unobligated Balance – Not Available: 
Taxpayer Service: $158; 
Enforcement: $87; 
Operations Support: $110; 
Other Appropriations: $111; 
Total: $466. 

Total Status of Budgetary Resources: 
Taxpayer Service: $2,577; 
Enforcement: $4,952; 
Operations Support: $4,144; 
Other Appropriations: $501; 
Total: $12,174. 

Change in Obligated Balance: Obligated Balance, Net, Brought Forward, 
October 1: 
Taxpayer Service: $235; 
Enforcement: $296; 
Operations Support: $753; 
Other Appropriations: $143; 
Total: $1,427. 

Change in Obligated Balance: Obligations Incurred: 
Taxpayer Service: $2,396; 
Enforcement: $4,852; 
Operations Support: $3,960; 
Other Appropriations: $276; 
Total: $11,484. 

Change in Obligated Balance: Gross Outlays: 
Taxpayer Service: ($2,385); 
Enforcement: ($4,814); 
Operations Support: ($3,894); 
Other Appropriations: ($295); 
Total: ($11,388). 

Change in Obligated Balance: Recoveries of Prior Year Unpaid 
Obligations, Actual: 
Taxpayer Service: ($22); 
Enforcement: ($21); 
Operations Support: ($51); 
Other Appropriations: ($12); 
Total: ($106). 

Change in Obligated Balance: Change in Uncollected Customer Payments 
from Federal Sources: 
Taxpayer Service: [Empty]; 
Enforcement: ($12); 
Operations Support: ($11); 
Other Appropriations: [Empty]; 
Total: ($23). 

Obligated Balances, Net, End of Period: 
Taxpayer Service: $224; 
Enforcement: $301; 
Operations Support: $757; 
Other Appropriations: $112; 
Total: $1,394. 

Net Outlays: Gross Outlays: 
Taxpayer Service: $2,385; 
Enforcement: $4,814; 
Operations Support: $3,894; 
Other Appropriations: $295; 
Total: $11,388. 

Net Outlays: Offsetting Collections: 
Taxpayer Service: ($42); 
Enforcement: ($49); 
Operations Support: ($36); 
Other Appropriations: ($9); 
Total: ($136). 

Net Outlays: Distributed Offsetting Receipts: 
Taxpayer Service: [Empty]; 
Enforcement: [Empty]; 
Operations Support: [Empty]; 
Other Appropriations: ($201); 
Total: ($201). 

Total, Net Outlays: 
Taxpayer Service: $2,343; 
Enforcement: $4,765; 
Operations Support: $3,858; 
Other Appropriations: $85; 
Total: $11,051. 

2007 Schedule of Budgetary Resources by Major Budget Accounts (In 
Millions): 

Budgetary Resources: Unobligated Balance, Brought Forward, October 1: 
Taxpayer Service: $154; 
Enforcement: $85; 
Operations Support: $91; 
Other Appropriations: $222; 
Total: $552. 

Budgetary Resources: Recoveries of Prior Year Unpaid Obligations: 
Taxpayer Service: $89; 
Enforcement: $36; 
Operations Support: $44; 
Other Appropriations: $14; 
Total: $183; 

Budgetary Resources: Budget Authority: Appropriations: 
Taxpayer Service: $2,157; 
Enforcement: $4,742; 
Operations Support: $3,471; 
Other Appropriations: $406; 
Total: $10,776. 

Budgetary Resources: Budget Authority: Spending Authority from 
Offsetting Collections: 
Taxpayer Service: $30; 
Enforcement: $48; 
Operations Support: $31; 
Other Appropriations: $10; 
Total: $119. 

Budgetary Resources: Nonexpenditure Transfers, Net: 
Taxpayer Service: $53; 
Enforcement: ($82); 
Operations Support: $1706; 
Other Appropriations: ($137); 
Total: $4. 

Budgetary Resources: Permanently Not Available: 
Taxpayer Service: ($33); 
Enforcement: ($13); 
Operations Support: ($23); 
Other Appropriations: ($4); 
Total: ($73). 

Total Budgetary Resources: 
Taxpayer Service: $2,4507; 
Enforcement: $4,816; 
Operations Support: $3,784; 
Other Appropriations: $511; 
Total: $11,561. 

Status of Budgetary Resources: Obligations Incurred: 
Taxpayer Service: $2,267;
Enforcement: $4,715; 
Operations Support: $3,650; 
Other Appropriations: $265; 
Total: $10,897. 

Status of Budgetary Resources: Unobligated Balance – Available: 
Taxpayer Service: $11; 
Enforcement: $16; 
Operations Support: $54; 
Other Appropriations: $90; 
Total: $171. 

Status of Budgetary Resources: Unobligated Balance – Not Available: 
Taxpayer Service: $172; 
Enforcement: $85; 
Operations Support: $80; 
Other Appropriations: $156; 
Total: $493. 

Total Status of Budgetary Resources: 
Taxpayer Service: $2,450; 
Enforcement: $4,816; 
Operations Support: $3,784; 
Other Appropriations: $511; 
Total: $11,561. 

Change in Obligated Balance: Obligated Balance, Net, Brought Forward, 
October 1: 
Taxpayer Service: $448; 
Enforcement: $324; 
Operations Support: $572; 
Other Appropriations: $178; 
Total: $1,522. 

Change in Obligated Balance: Obligations Incurred: 
Taxpayer Service: $2,267; 
Enforcement: $4,715; 
Operations Support: $3,650; 
Other Appropriations: $265; 
Total: $10,897. 

Change in Obligated Balance: Gross Outlays: 
Taxpayer Service: ($2,391); 
Enforcement: ($4,706); 
Operations Support: ($3,416); 
Other Appropriations: ($287); 
Total: ($10,800). 

Change in Obligated Balance: Recoveries of Prior Year Unpaid 
Obligations, Actual: 
Taxpayer Service: ($89); 
Enforcement: ($36); 
Operations Support: ($44); 
Other Appropriations: ($14); 
Total: ($183). 

Change in Obligated Balance: Change in Uncollected Customer Payments 
from Federal Sources: 
Taxpayer Service: [Empty]; 
Enforcement: ($1); 
Operations Support: ($8); 
Other Appropriations: [Empty]; 
Total: ($9). 

Obligated Balances, Net, End of Period: 
Taxpayer Service: $235; 
Enforcement: $296; 
Operations Support: $754; 
Other Appropriations: $142; 
Total: $1,427. 

Net Outlays: Gross Outlays: 
Taxpayer Service: $2,391; 
Enforcement: $4,706; 
Operations Support: $3,416; 
Other Appropriations: $287; 
Total: $10,800. 

Net Outlays: Offsetting Collections: 
Taxpayer Service: ($30); 
Enforcement: ($46); 
Operations Support: ($23); 
Other Appropriations: ($11); 
Total: ($110). 

Net Outlays: Distributed Offsetting Receipts: 
Taxpayer Service: [Empty]; 
Enforcement: [Empty]; 
Operations Support: [Empty]; 
Other Appropriations: ($164); 
Total: ($164). 

Total, Net Outlays: 
Taxpayer Service: $2,3613; 
Enforcement: $4,660; 
Operations Support: $3,393; 
Other Appropriations: $112; 
Total: $10,526. 

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 2008, the total 
estimated payout (including principal and interest) for claims pending 
judicial review by the Federal courts is $5.0 billion and by Appeals is
$17.0 billion. In FY 2007, the total estimated payout (including 
principal and interest) for claims pending judicial review by the 
Federal courts was $8.8 billion and by Appeals was $5.9 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: 
2008: $278; 
2007: $263. 

Compliance assessments: 
2008: ($67); 
2007: ($65). 

Write-offs: 
2008: ($99); 
2007: ($100). 

Gross Federal taxes receivables: 
2008: $112; 
2007: $98. 

Allowance for uncollectible taxes receivable: 
2008: ($83); 
2007: ($72). 

Federal taxes receivable, net: 
2008: $29; 
2007: $26. 

IRS cannot reasonably estimate the amount of allowance for 
uncollectible taxes receivable 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 $4 billion as of 
September 30, 2008 and $6 billion as of September 30, 2007, which 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. 

Statement of Net Cost by Responsibility Segment (In Millions): 

Operating divisions: WAGE: 
2008: $3,266; 
2007: $3,048. 

Operating divisions: SBSE: 
2008: $2,585; 
2007: $2,548. 

Operating divisions: LMSB: 
2008: $842; 
2007: $821; 

Operating divisions: TEGE: 
2008: $272; 
2007: $267. 

Operating divisions: Total: 
2008: $6,965; 
2007: $6,684. 

Functional divisions: Appeals: 
2008: $218; 
2007: $211. 

Functional divisions: Chief Counsel: 
2008: $326; 
2007: $319. 

Functional divisions: Criminal Investigations: 
2008: $632; 
2007: $604. 

Functional divisions: Taxpayer Advocate: 
2008: $207; 
2007: $192. 

Functional divisions: Communications: 
2008: $28; 
2007: $26. 

Functional divisions: Total: 
2008: $1,411; 
2007: $1,352. 

Operating Net Cost: 
2008: $8,376; 
2007: $8,036. 

General and Administration: 
2008: $1,598; 
2007: $1,555. 

Information Technology: 
2008: $1,864; 
2007: $1,766. 

Depreciation/Loss on Disposal: 
2008: $355; 
2007: $378. 

Net Cost of Operations: 
2008: $12,193; 
2007: $11,735. 

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 2008, IRS issued $34 
billion in child tax credit refunds. An additional $31 billion of child 
tax credits were applied to reduce taxpayer liability. 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. 

Earned Income Tax Credit: 

The EITC is a special credit for employed taxpayers whose earnings fall 
below the established allowance ceiling. In FY 2008, IRS issued $41 
billion in EITC refunds. In FY 2007, IRS issued $38 billion in EITC 
refunds. An additional $6.2 billion and $5.1 billion of the EITC was 
applied to reduce taxpayer liability for FY 2008 and FY 2007, 
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 self-employment 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 $102,000 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 $102,000 for calendar year 2008. The income 
ceiling for both wages and tips and self-employment income was $97,500 
for calendar year 2007. 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 $665 billion and $664 billion in FY 2008 
and FY 2007, respectively. Medicare taxes collected by IRS were 
estimated to be approximately $195 billion and $193 billion in FY 2008 
and FY 2007, 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. 

Figure: Average Individual Income Tax Liability And Average Adjusted 
Gross Income (AGI), Tax Year 2006: 

[Refer to PDF for image] 

This figure is a multiple vertical bar graph depicting Average AGI and 
Average income tax in the following categories: 
Under $15,000; 
$15,000 to under $30,000; 
$30,000 to under $50,000; 
$50,000 to under $100,000; 
$100,000 to under $200,000; 
$200,000 or more. 

Adjusted gross income (AGI): Under $15,000; 
Number of taxable returns (in thousands): 37,614; 
AGI (in millions): $188,624; 
Total income tax (in millions): $3,141; 
Average AGI per return (in whole dollars): $5,015; 
Average income tax per return (in whole dollars): $84; 
Income tax as a percentage of AGI: 1.7%. 

Adjusted gross income (AGI): $15,000 under $30,000; 
Number of taxable returns (in thousands): 29,649; 
AGI (in millions): $655,386; 
Total income tax (in millions): $22,562; 
Average AGI per return (in whole dollars): $22,105; 
Average income tax per return (in whole dollars): $761; 
Income tax as a percentage of AGI: 3.4%. 

 
Adjusted gross income (AGI): $30,000 under $50,000; 
Number of taxable returns (in thousands): 24,907; 
AGI (in millions): $973,569; 
Total income tax (in millions): $59,846; 
Average AGI per return (in whole dollars): $39,088; 
Average income tax per return (in whole dollars): $2,403; 
Income tax as a percentage of AGI: 6.1%. 

 
Adjusted gross income (AGI): $50,000 under $100,000; 
Number of taxable returns (in thousands): 30,053; 
AGI (in millions): $2,123,894; 
Total income tax (in millions): $185,019; 
Average AGI per return (in whole dollars): $70,672; 
Average income tax per return (in whole dollars): $6,156; 
Income tax as a percentage of AGI: 8.7%. 

Adjusted gross income (AGI): $100,000 under $200,000; 
Number of taxable returns (in thousands): 12,110; 
AGI (in millions): $1,610,028; 
Total income tax (in millions): $210,538; 
Average AGI per return (in whole dollars): $132,956; 
Average income tax per return (in whole dollars): $17,386; 
Income tax as a percentage of AGI: 13.1%. 

Adjusted gross income (AGI): $200,000 or more; 
Number of taxable returns (in thousands): 4,088; 
AGI (in millions): $2,431,160; 
Total income tax (in millions): $545,226; 
Average AGI per return (in whole dollars): $594,740; 
Average income tax per return (in whole dollars): $133,380; 
Income tax as a percentage of AGI: 22.4%. 

Adjusted gross income (AGI): Total; 
Number of taxable returns (in thousands): 138,421
AGI (in millions): $7,982,661
Total income tax (in millions): $1,026,332. 

All figures are estimates and based on samples provided by the 
Statistics of Income (SOI) Office. 

[End of figure] 

Figure: Individual Income Tax Liability As A Percentage Of AGI, Tax 
Year 2006: 

[Refer to PDF for image] 

This figure is a vertical bar graph depicting Individual Income Tax 
Liability As A Percentage Of AGI in the following categories: 

Under $15,000: approximately 2%; 
$15,000 to under $30,000: approximately 4%; 
$30,000 to under $50,000: approximately 5%; 
$50,000 to under $100,000: approximately 8%; 
$100,000 to under $200,000: approximately 12%; 
$200,000 or more: approximately 22%; 

All figures are estimates and based on samples provided by the 
Statistics of Income (SOI) Office. 

[End of figure] 

Figure: Corporation Tax Liability As A Percentage Of Taxable Income, 
Tax Year 2005 Data: 

[Refer to PDF for image] 

This figure is a vertical bar graph depicting Corporation Tax Liability 
As A Percentage Of Taxable Income in the following categories: 
Zero assets; 
$1 to under $500; 
$500 to under $1,000; 
$1,000 to under $5,000; 
$5,000 to under $10,000; 
$10,000 to under $25,000; 
$25,000 to under $50,000; 
$50,000 to under $100,000; 
$100,000 to under $250,000; 
$250,000 or more. 

Total Assets: Zero Assets: 
Income subject to tax (in millions): $19,086
Total income tax after credits (in millions): $5,094
Percentage of income tax after credits to taxable income: 26.7%. 

 
Total Assets: $1 under $500; 
Income subject to tax (in millions): $9,223
Total income tax after credits (in millions): $1,698
Percentage of income tax after credits to taxable income: 18.4%. 

Total Assets: $500 under $1,000; 
Income subject to tax (in millions): $4,473; 
Total income tax after credits (in millions): $1,043; 
Percentage of income tax after credits to taxable income: 23.3%. 
 
Total Assets: $1,000 under $5,000; 
Income subject to tax (in millions): $14,935; 
Total income tax after credits (in millions): $4,372; 
Percentage of income tax after credits to taxable income: 29.3%. 
 
Total Assets: $5,000 under $10,000; 
Income subject to tax (in millions): $9,367; 
Total income tax after credits (in millions): $3,060; 
Percentage of income tax after credits to taxable income: 32.7%. 

Total Assets: $10,000 under $25,000; 
Income subject to tax (in millions): $13,506; 
Total income tax after credits (in millions): $4,456; 
Percentage of income tax after credits to taxable income: 33.0%. 

Total Assets: $25,000 under $50,000; 
Income subject to tax (in millions): $13,459; 
Total income tax after credits (in millions): $4,366; 
Percentage of income tax after credits to taxable income: 32.4%. 
 
Total Assets: $50,000 under $100,000; 
Income subject to tax (in millions): $14,239; 
Total income tax after credits (in millions): $4,624; 
Percentage of income tax after credits to taxable income: 32.5%. 

Total Assets: $100,000 under $250,000; 
Income subject to tax (in millions): $31,250; 
Total income tax after credits (in millions): $9,935; 
Percentage of income tax after credits to taxable income: 31.8%. 

Total Assets: $250,000 or more; 
Income subject to tax (in millions): $1,071,781; 
Total income tax after credits (in millions): $273,431; 
Percentage of income tax after credits to taxable income: 25.5%. 

Total: 
Income subject to tax (in millions): $1,201,319; 
Total income tax after credits (in millions): $312,079; 
Percentage of income tax after credits to taxable income: 26.0%. 

All figures are estimates and based on samples provided by the 
Statistics of Income (SOI) Office. 

[End of figure] 

[End of Financial Statements] 

Appendix I: Material Weaknesses, Significant Deficiency, and Compliance 
Issues: 

Material Weaknesses: 

During our audits of the Internal Revenue Service’s (IRS) fiscal years 
2008 and 2007 financial statements, we identified three material 
weaknesses in internal control. These material weaknesses have given 
rise to significant management challenges that have (1) impaired 
management’s ability to prepare its balance sheet without extensive 
compensating procedures, (2) limited the availability of reliable 
information to assist management in effectively managing operations on 
an ongoing basis, (3) resulted in errors in taxpayer accounts, (4) 
increased taxpayer burden, and (5) 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, and (3) information security. We reported on 
each of these issues last year[Footnote 24] and in prior audits. We 
highlight these issues in the following sections. 

In previous years, we reported a material weakness in IRS’s internal 
control over tax revenue and refunds because IRS’s controls were not 
fully effective in providing management the essential information it 
needs to make informed decisions on how best to maximize the federal 
government’s ability to collect tax revenues owed and minimize the risk 
of paying improper tax refunds. Specifically, in our fiscal year 2007 
audit, we reported that IRS did not have agencywide cost-benefit 
information; related cost-based performance measures; or an agency-
wide, systematic approach to maximizing its enforcement efforts. We 
also reported that IRS had made significant progress in addressing 
these issues, such as developing a cost accounting policy that provides 
guidance in managerial cost concepts for the agency and initiating 
several cost pilot projects to develop a methodology for determining 
the full cost of IRS’s various enforcement programs. 

During fiscal year 2008, IRS made further significant progress. IRS (1) 
improved its cost accounting by establishing an Office of Cost 
Accounting within the Chief Financial Officer’s organization to 
implement its cost accounting policy and by completing three cost pilot 
projects to demonstrate the viability of IRS’s methodology for 
determining the full cost of its enforcement programs, (2) further 
enhanced its performance measures and completed development of return 
on investment information for the Earned Income Tax Credit program that 
includes full costs, (3) established corporate governance bodies that 
collectively represent significant progress in establishing an 
agencywide approach to governance of IRS’s enforcement activities, and 
(4) improved its management of tax collection efforts by continuing to 
implement sophisticated computer analysis and modeling to prioritize 
and focus its collection activities. IRS has also developed plans to 
perform ongoing analyses of the tax gap, which will include information 
on the extent of overclaims, of which disbursements of improper refunds 
are a component. IRS’s actions have sufficiently mitigated the affects 
of these weaknesses in control over tax revenue and refunds such that 
we no longer consider them to constitute a material weakness. However, 
the remaining control deficiencies, we believe, constitute a 
significant deficiency in internal control. This is discussed in a 
later section of this report. 

Financial Reporting: 

In fiscal year 2008, as in prior years, IRS did not have financial 
management systems adequate to enable it to timely and accurately 
generate and report 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 2008, 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 discrete activities 
and programs and did not have cost-based performance information. 
Although IRS’s financial statements were fairly stated as of September 
30, 2008 and September 30, 2007, the underlying records do not provide 
the real-time data needed to assist in managing operations on a daily 
basis and to provide an informed basis for making or justifying 
resource allocation decisions. 

In fiscal year 2007,[Footnote 25] we reported that IRS’s core general 
ledger system for tax-administration-related transactions, the Interim 
Revenue Accounting Control System (IRACS), was not supported by 
adequate audit trails for any of the most material tax related 
balances, including tax revenue, tax refunds, or taxes receivable. Such 
traceability is necessary to enable IRS to ensure that recorded 
transactions are complete, accurate, and supported by underlying 
records. During fiscal year 2008, IRS devoted significant resources to 
addressing this condition and made substantial progress. For example, 
IRS instituted the use of trace identification numbers (trace ID) for 
revenue and refund transactions in order to provide this traceability 
from IRACS back to source documentation and throughout IRS’s financial 
management system. For tax refunds, as well as for tax revenue 
transactions processed through the Electronic Federal Tax Payment 
System (EFTPS),[Footnote 26] we were able to verify that these trace 
IDs were effective in providing this transaction traceability. However, 
we also found that for tax revenue transactions processed outside of 
EFTPS (which accounted for about 22 percent of total tax revenue 
collected in fiscal year 2008), providing this traceability to IRACS 
necessitated IRS employees transcribing the trace IDs manually for 
input. Since trace IDs for revenue transactions are numerous digits in 
length, there is a significant risk of human error inherent in this 
process. As of September 30, 2008, IRS had not instituted controls to 
minimize the risk of transcription and input errors occurring and not 
being detected and corrected. In addition, and as we reported in prior 
years, IRS’s reported balance for federal taxes receivable, which 
comprised over 81 percent of IRS’s total assets as reported on its 
fiscal year 2008 balance sheet, was not posted to IRACS.[Footnote 27] 
This was because it was the product of a complex statistical estimation 
process rather than the summation of the traditional posting of 
individual transactions.[Footnote 28] Consequently, IRACS does not 
substantially comply with the U.S. Government Standard General Ledger 
(SGL) at the transaction level, and Federal Financial Management 
Systems Requirements (FFMSR) embodied in OMB Circular No. A-127, 
Financial Management Systems.[Footnote 29] 

During fiscal year 2007, we reported that IRS continued to make 
progress in improving its cost accounting capabilities. Specifically, 
IRS issued its first cost accounting policy in August 2007, which 
provided 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, we reported that IRS was 
conducting a series of cost pilot projects in an effort to establish 
the relationship between its costs and its products and services. 

During fiscal year 2008, IRS completed the cost pilot projects and 
concluded that it has the capability to use the cost data within its 
Integrated Financial System (IFS) and the associated workload and 
production data from its business unit systems to calculate the full 
costs of its products, services, and programs. IRS produced cost 
information for three of its programs (i.e., Automated Underreporter, 
Field Assistance, and Submission Processing)[Footnote 30] and plans to 
periodically produce this information and expand the availability of 
cost accounting information to other programs in future years. In 
fiscal year 2009, IRS plans to prioritize its products and services for 
which cost information is needed and develop the necessary processes to 
systematically produce full cost accounting information for them to 
support management decision making. 

We commend IRS for the positive steps it has taken in developing a 
practical approach to use the cost information within IFS to 
systematically produce managerial cost data that are defensible, 
reliable, and consistent. Moving expeditiously to determine its cost 
accounting priorities and develop the processes to routinely produce 
the associated cost accounting data will allow IRS to realize the full 
potential of its cost accounting capabilities. 

Despite significant progress made during fiscal year 2008, 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 efforts, IRS 
continued to lack reliable and timely financial information to assist 
in managing operations throughout fiscal year 2008. Addressing the 
financial management 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 2008, we continued to find serious internal control 
issues that affected IRS’s management of unpaid tax assessments. 
Specifically, we continued to find (1) that IRS lacked a subsidiary 
ledger for unpaid tax assessments that would allow it to produce 
reliable, 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 made progress in 
addressing the lack of a subsidiary ledger for unpaid assessments, 
certain system limitations and errors in taxpayer accounts nevertheless 
continued to hinder IRS’s ability to effectively manage its unpaid tax 
assessments. 

Unpaid assessments are legally enforceable claims against taxpayers and 
consist of taxes, penalties, and interest that have not been collected 
or abated.[Footnote 31] Based on federal accounting standards, unpaid 
assessments are required to be classified into one of the following 
three categories for reporting purposes: federal taxes receivables, 
compliance assessments, and write-offs.[Footnote 32] However, IRS’s 
master files[Footnote 33] and general ledger were not designed to 
classify and report out each of these three categories of unpaid 
assessments in accordance with federal accounting standards. To 
compensate for this, IRS must apply statistical sampling and estimation 
techniques to data from its master files to estimate the year-end 
balances of (1) taxes receivable in its financial statements and 
required supplementary information, and (2) compliance assessments and 
write-offs in its required supplementary information. This manual 
compensating process is complex, labor-intensive, and requires several 
months to complete. 

While IRS has made significant progress over the last several years, it 
continues to lack a subsidiary ledger that tracks and accumulates 
unpaid assessments and their status on an ongoing basis for business 
purposes, including external reporting. Recognizing the seriousness of 
this deficiency, IRS began a phased-in implementation of the Custodial 
Detail Data Base (CDDB) in 2006. As discussed earlier, 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. CDDB would function as a 
subsidiary ledger for unpaid tax assessments by linking and classifying 
taxpayer account information from IRS’s master files to its general 
ledger for tax administration activities, IRACS. IRS enhanced CDDB in 
fiscal year 2008 to weekly analyze and record unpaid assessment 
balances from its master file, including related interest and penalty 
accruals, to its general ledger by the various financial reporting 
categories (taxes receivable, compliance assessments, and write-offs). 
These enhancements established CDDB’s capability to function 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. Even though CDDB is capable of 
analyzing master file data weekly to produce tax debt information 
classified into the various financial reporting categories, this 
information still contains material inaccuracies. For example, through 
its use of its statistical sampling and estimation techniques, IRS 
identified errors necessitating over $14 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. Furthermore, IRS does not record in 
IRACS the amounts derived from the statistical estimation process, 
including taxes receivable. Hence, the taxes receivable balance and 
related amounts due to Treasury reported on the balance sheet are not 
traceable to IRACS. Since they are products of a statistical estimation 
process rather than summations of individual transactions, there is 
also currently no transaction traceability from the taxes receivable - 
related amounts on IRS financial statements back to underlying source 
documentation. 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 external reporting. Full 
operational capability of CDDB depends on the successful implementation 
of future system releases planned through 2009 and the ability of these 
releases to address current limitations in accurately classifying all 
of IRS’s unpaid assessments. 

IRS’s management and reporting of unpaid tax assessments also continued 
to be hindered by inaccurate tax records. We continued to find errors 
in taxpayer records resulting from IRS’s not recording information 
accurately and timely. Such errors directly affect the accuracy of the 
tax debt information classified by category as produced by CDDB. 
Additionally, such errors can cause frustration to taxpayers who either 
have already paid taxes owed or who owe significantly lower amounts. 

For example, during our audit, we found that IRS erroneously assessed a 
gift tax against a taxpayer for over $14 billion. The taxpayer had 
filed a tax return reporting a gift valued at approximately $260,000 
made with no taxes due.[Footnote 34] However, IRS entered amounts from 
two separate lines of the tax return as a single amount into its 
system, causing it to record the value of the gift as almost $26 
billion. This, in turn, caused IRS’s systems to calculate a tax 
deficiency of almost $12 billion. Along with associated penalties and 
interest, IRS sent the taxpayer an erroneous notice of taxes due for 
over $14 billion. In another example, IRS assessed a business over $9 
million in penalties for failing to provide a required supporting 
schedule along with its quarterly payroll tax return and sent the 
business a notice for the amount due. When IRS subsequently examined 
the business tax return, it determined that the required schedule was 
in fact attached to the return. Although IRS identified and 
subsequently corrected these errors, it did so only after 
inconveniencing the taxpayers. In addition, because the $14 billion 
erroneous gift tax assessment posted to its master files just prior to 
IRS’s fiscal year-end cut-off, the balance was included in the year-end 
taxes receivable balance produced by CDDB. Consequently, IRS had to 
make an additional adjustment to deduct the $14 billion when deriving 
its year-end taxes receivable balance for external financial reporting. 
This $14 billion adjustment was in addition to the $14 billion 
adjustment recorded to the CDDB-produced balance based on IRS’s 
statistical estimation of the balance for taxes receivable. 

We also continued to find errors involving IRS’s failure to properly 
record payments to all related taxpayer accounts associated with unpaid 
payroll taxes.[Footnote 35] As in prior years,[Footnote 36] IRS’s 
systems are still unable to automatically reflect a reduction in the 
amounts owed on the related accounts when the business or any officer 
of that business pays some or all of the outstanding taxes. However, 
IRS has made significant progress in this area over the past several 
years. For example, IRS established procedures to more clearly link 
each penalty assessment against an officer to a specific tax period of 
the business account and began phasing in the use of an Automated Trust 
Fund Recovery (ATFR) system intended to properly cross-reference 
payments received. As a result of IRS’s actions, the number of errors 
we identified this year was significantly less than in prior years. IRS 
also enhanced ATFR in fiscal year 2008 to begin automatically reducing 
the amounts owed on all related accounts when a payment is received 
from one related party. However, the system is currently unable to 
process all payments related to such cases. Consequently, IRS must 
continue to manually reduce the account balance on related accounts for 
some payments. Thus, the opportunity for errors and omissions continues 
to exist. 

Additionally, we again found errors in IRS’s master file programs for 
calculating and assessing penalties associated with outstanding tax 
debt.[Footnote 37] For example, we identified two separate situations 
where IRS’s computer programs used an earlier date than prescribed in 
its policies to begin the calculation of the penalty amount. In another 
instance, IRS’s computer programs failed to reduce the penalty rate 
used to accrue additional penalties on the outstanding balance of taxes 
owed once the taxpayer entered into an installment agreement with IRS 
to pay off the tax liability over time. In these cases, the penalties 
assessed against the taxpayers were higher than they should have been. 
While these errors did not affect a significant number of taxpayers nor 
have a material affect on IRS’s unpaid assessment balance, they 
nevertheless represent yet another type of error contained in IRS’s 
records of unpaid assessments that affect the accuracy of reporting and 
could adversely affect taxpayers. 

IRS processing delays also contributed to inaccurate tax records. 
During our audit, we identified three cases where documentation showed 
that a business had been defunct[Footnote 38] for some time but IRS had 
not recorded the defunct status of the business in its master files. 
One of these businesses had been defunct since May 2005. As a result, 
CDDB misclassified these accounts as taxes receivable rather than as 
write-offs. IRS had to reclassify a substantial portion of the balance 
of these accounts as part of its estimation process. 

These processing errors and delays contribute to inaccurate tax records 
and result in IRS having to make numerous adjustments as part of its 
process for estimating the balance of net taxes receivable and other 
unpaid tax assessments. When IRS identified errors and delays similar 
to those described above when reviewing its sample of unpaid assessment 
cases, it recorded adjustments to the affected account to reflect the 
correct value of that account at the point in time that IRS extracted 
the account information. On the basis of a statistical projection of 
these individual adjustments, IRS had to make multibillion dollar 
adjustments to the year-end balances of all three categories of unpaid 
assessments produced by CDDB in order to produce reliable amounts for 
external reporting on its balance sheet and required supplementary 
information. 

Furthermore, such processing errors and delays contribute to IRS’s 
inability to timely release federal tax liens against taxpayers who 
have fully satisfied or are otherwise relieved of their tax liability. 
As with the delays previously described, delays by IRS in recording 
bankruptcy discharges and processing offers-in-compromise[Footnote 39] 
result not only in inaccurate tax records but also delays in IRS’s 
release of federal tax liens. This, in turn, causes undue burden to 
taxpayers who are attempting to sell property or apply for commercial 
credit.[Footnote 40] 

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, 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. 

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; and improper disclosure, modification, 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 information security weaknesses identified during our 
previous audits remained uncorrected and continued to jeopardize the 
confidentiality, availability, and integrity of information processed 
by IRS’s key systems, increasing the risk of material misstatement for 
financial reporting. IRS has made progress in resolving these 
weaknesses, taking actions such as implementing controls for 
unauthenticated network access and user IDs on the mainframe, 
encrypting sensitive data going across the IRS network, improving the 
patching of critical vulnerabilities, improving the disposal of 
removable media, and updating contingency plans to document critical 
business processes. 

Despite these actions, weaknesses remain. For example, sensitive 
information, including user IDs and passwords for mission-critical 
applications, continued to be readily available to any user on IRS’s 
internal network. These IDs and passwords could be used by a malicious 
user to compromise data flowing to and from IFS. Other continuing 
weaknesses included the existence of passwords that were not complex 
enough to avoid being guessed or cracked. In addition, although IRS had 
improved its application of vendor-supplied system patches that protect 
against known vulnerabilities, it still had not consistently patched 
systems in a timely manner. The agency’s procurement system, which 
processed approximately $1.8 billion of obligations in fiscal year 
2008, also remained at risk because previously reported weaknesses had 
not been corrected. These weaknesses included (1) not restricting 
users’ ability to bypass application controls, (2) continuing to use 
unencrypted protocols, and (3) not removing separated employees’ access 
in a timely manner. These outstanding weaknesses increase the risk that 
data processed by the agency’s financial management systems are not 
reliable. 

In fiscal year 2008, we and the Treasury Inspector General for Tax 
Administration (TIGTA) continued to identify new weaknesses in controls 
for protecting access to systems and information, as well as other 
information security controls that affect key financial systems, such 
as IRACS. For example, the processing environment that supports IRACS 
lacks a configuration baseline, which prevents IRS from adequately 
tracking and monitoring changes to the system, thereby increasing the 
risk that unauthorized program changes may not be detected. In 
addition, weaknesses in access controls to network devices could allow 
users unneeded authorization to IRS’s network infrastructure and allow 
unauthorized access to applications and data supported by the network, 
including IFS. Similarly, TIGTA has also reported[Footnote 41] that 
access controls over the administration of network devices were not 
effective to control unauthorized use. TIGTA found that system 
administrators had set up accounts that could allow them to bypass 
authentication controls and make undetected changes to network devices, 
noting that this condition could allow a disgruntled employee or 
contractor to make changes to those devices to steal taxpayer 
information or disrupt IRS computer operations. TIGTA also recently 
reported[Footnote 42] that two of IRS’s most important modernized 
systems—CADE and the Account Management Services (AMS)[Footnote 
43]—were deployed with known security vulnerabilities relating to the 
protection of sensitive data, system access, monitoring of system 
access, and disaster recovery. As a result, TIGTA concluded that these 
vulnerabilities increase the risks that (1) an unscrupulous person, 
with little chance of detection, could gain unauthorized access to the 
vast amount of taxpayer information the IRS processes, and (2) the 
systems could not be recovered effectively and efficiently during an 
emergency. 

The weaknesses in IRS’s financial systems are due in part to IRS’s not 
fully implementing its information security program[Footnote 44] to 
ensure that controls are effectively established and maintained. IRS 
has developed and documented its program, but it has not fully or 
consistently implemented program requirements for key information 
systems. For example, although IRS has developed and implemented a 
process to address deficiencies in its information security policies, 
procedures, and practices, it did not sufficiently verify whether 
remedial actions were implemented or effective in mitigating the 
vulnerability. To illustrate, IRS informed us that they had corrected 
65 of the 115 previously reported weaknesses. However, we found that 
remedial actions for 16 of the 65 weaknesses that IRS informed us had 
been corrected had not been fully implemented. 

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 unresolved deficiencies from prior audits and the newly identified 
deficiencies in fiscal year 2008 represent a material weakness in IRS’s 
internal control over its financial systems. Collectively, these 
deficiencies reduce IRS’s ability to ensure that its financial and 
taxpayer information is secure 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 deficiencies. 

To address these deficiencies, IRS has various initiatives under way. 
IRS has developed and documented a detailed road map to guide its 
efforts in targeting critical weaknesses. Additionally, the agency is 
in the process of implementing a comprehensive plan to address numerous 
information security weaknesses, such as those associated with network 
and system access, audit trails, system software configuration, 
security roles and responsibilities, and contingency planning. 
According to the plan, some of these weaknesses are not scheduled to be 
resolved for 4 or more years, including one not scheduled for 
completion until the start of fiscal year 2014. These efforts are a 
positive step towards improving the agency’s overall information 
security posture. 

Significant Deficiency: 

In addition to the material weaknesses previously discussed, we 
identified a significant deficiency concerning weaknesses in IRS’s 
internal control over tax revenue and refunds. 

In our previous report on the results of our audit of IRS’s fiscal year 
2007 financial statements,[Footnote 45] we also discussed weaknesses in 
IRS’s internal control designed to safeguard hard-copy taxpayer 
receipts and data, which we considered to constitute a significant 
deficiency. For example, we identified weaknesses in (1) physical 
security controls designed to prevent unauthorized access to IRS’s 
receipt processing facilities, (2) procedural safeguards and controls 
designed to account for, control, and protect taxpayer receipts and 
related taxpayer information, and (3) controls designed to safeguard 
hard-copy taxpayer receipts and related taxpayer data during transport 
between IRS business units and to or from third parties, such as 
depository institutions. We had been reporting on this significant 
deficiency each year since our fiscal year 1997 financial audit, and 
IRS has devoted substantial efforts over the years to address the 
issues comprising this significant deficiency. In fiscal year 2008, we 
found that IRS significantly improved the controls that safeguard hard-
copy taxpayer receipts and data processed at its primary submission 
processing facilities-service center campuses and lockbox banks. 
[Footnote 46] Most notably, controls were significantly improved at 
IRS’s lockbox banks, which processed approximately $411 billion in hard-
copy taxpayer receipts in fiscal year 2008, or nearly 78 percent of all 
hard-copy tax payments received. For example, the number of internal 
control issues in this area we identified in fiscal year 2008 decreased 
by 80 percent from fiscal year 2007, and for the first time, we did not 
identify any issues at one of the three lockbox banks we visited. These 
improvements, combined with the progress we reported in previous 
audits, have enabled us to conclude that remaining issues identified 
during fiscal year 2008 related to hard-copy taxpayer receipts and data 
no longer constitute a significant deficiency in internal control. 

Tax Revenues and Refunds: 

Weaknesses in control over tax revenue and refunds continue to hamper 
IRS’s ability to optimize the use of its limited resources to collect 
unpaid taxes and minimize payment of improper refunds. Specifically, 
IRS has not (1) developed performance metrics and goals on the cost of, 
and the revenue collected from, IRS’s various enforcement programs and 
activities,[Footnote 47] and (2) fully established and implemented the 
financial management structure and processes to provide IRS key 
financial management data on costs and enforcement tax revenue. These 
deficiencies inhibit IRS’s ability to appropriately assess and 
routinely monitor the relative merits of its various enforcement 
initiatives and adjust its strategies as needed. This, in turn, can 
significantly affect the level of enforcement tax revenue collected and 
improper refunds disbursed.[Footnote 48] Addressing these issues 
successfully is fundamental to IRS’s ability to effectively apply cost 
and enforcement revenue information to managing its enforcement 
activities, especially the collection of unpaid taxes. 

IRS’s existing agencywide enforcement performance measures and related 
performance goals do not include measures of the full cost of, or the 
revenue collected from, enforcement activities. Rather, IRS’s current 
performance measures focus on monitoring the internal enforcement-
related processes used by IRS, such as the number of cases examined. 
[Footnote 49] We have previously reported on and made recommendations 
regarding IRS’s lack of performance measures based on reliable full 
cost and benefit data. For example, based on the findings from our 
audit of IRS’s fiscal year 1999 financial statements, we recommended 
that IRS develop the data to support meaningful cost information 
categories and cost-based performance measures.[Footnote 50] These 
recommendations remained open in our July 2008 update on the status of 
recommendations we have made to IRS.[Footnote 51] In addition, in our 
June 2008 report on IRS’s tax collection process,[Footnote 52] we 
reported that IRS has not set its performance measures and related 
goals to measure dollars collected. Additionally, in our July 2008 
report on IRS’s collection of unpaid payroll taxes,[Footnote 53] we 
reported that, although IRS has made the collection of unpaid payroll 
taxes one of its top priorities, it has not established goals or 
measures to assess its progress in collecting or preventing the 
accumulation of payroll tax debt. We further reported that IRS 
officials stated that they do not have specific lower-level performance 
measures that target collection actions or collection results for 
unpaid payroll taxes. We noted that such performance measures could be 
useful to IRS in measuring the success of its efforts to collect or 
prevent the further accumulation of unpaid payroll taxes and to 
formulate more effective approaches to dealing with this compliance 
issue. 

IRS management must consider many factors beyond cost and collections, 
such as coverage, compliance, and budgetary issues, when making 
resource allocation decisions. These factors, and the decisions IRS 
makes about how to respond to them, have a significant impact on 
collections. However, using full cost and collection information is 
also important. Performance metrics and related goals for IRS’s 
enforcement programs and activities, including measures of dollars 
collected compared to related costs incurred, are essential tools to 
assist management in assessing the relative merits of its options and 
optimizing the allocation of its resources. Consequently, measures that 
focus management’s attention on the effectiveness of its programs in 
achieving its primary mission of collecting taxes are fundamentally 
important. 

As we discussed, IRS has not completed the process of developing and 
institutionalizing the use of full cost data to measure the costs of 
its various enforcement programs. IRS’s recent completion of three cost 
pilot projects to demonstrate its ability to determine the full cost of 
selected activities is a notable achievement. However, IRS has not yet 
applied a comparable methodology to determine the full cost of its full 
range of programs, though it plans to do so. 

Additionally, IRS has not designed performance metrics that use 
enforcement revenue data. Although IRS has detailed enforcement revenue 
data, as we have previously reported,[Footnote 54] it has not developed 
performance metrics or goals for dollars collected to measure the 
effectiveness of IRS’s various enforcement programs. IRS officials have 
said that they do not make such enforcement revenue evaluations because 
of the potential for violating section 1204 (Basis for evaluation of 
Internal Revenue Service employees) of the Internal Revenue Service 
Restructuring and Reform Act of 1998, which prohibits the use of 
“records of tax enforcement results” to evaluate employees or impose or 
suggest production quotas or goals for employees and requires their 
performance be evaluated on the “fair and equitable treatment of 
taxpayers.”[Footnote 55] The statute does not establish a blanket 
prohibition on using quantity measures to evaluate organization 
performance, and implementing IRS regulations and guidance provide 
instructions on the proper uses of these statistical data.[Footnote 56] 
The guidance, issued in April 2007, specifically allows the use of 
“records of tax enforcement results” for forecasting, financial 
planning, resource management and the formulation of case selection 
criteria. Therefore, IRS may use enforcement results, such as revenue 
collected, to evaluate enforcement programs and activities to make well-
informed resource allocation decisions, but it must do so consistent 
with the prohibitions in section 1204 and implementing IRS regulations 
and guidance. 

Until such time as IRS has both full cost and enforcement revenue data 
available to measure return on investment and related organizational 
performance measures and goals, IRS’s evaluation of its programs and 
related decisions will continue to be based on the results of internal 
compliance processes rather than on the degree to which these programs 
are effective in collecting unpaid taxes. Without accurate data on 
program effectiveness, IRS cannot assess the extent to which its 
allocation of limited resources among competing priorities is 
maximizing the agency’s ability to collect unpaid taxes. 

The ability to provide IRS with full cost and revenue data on 
enforcement programs requires an organization structure and processes 
that can produce managerial cost and enforcement revenue accounting 
data and then implement their use. As discussed earlier, IRS has taken 
significant actions to implement managerial cost accounting. However, 
IRS has not completed the task of institutionalizing the use of 
managerial full cost data to support cost based performance measures or 
informed resource allocation decisions. IRS has yet to (1) develop a 
formalized plan to implement the cost policy and institutionalize the 
use of full cost information agencywide in making resource allocation 
decisions, (2) develop a monitoring plan through which IRS can ensure 
that the cost policy is being systematically and appropriately used, 
(3) extend its development of systemically produced managerial full 
cost information to the full range of IRS enforcement programs and 
activities, and (4) develop plans to institutionalize the use of full 
cost information in both strategic planning and ongoing operational 
resource allocation decisions agencywide. As mentioned previously, IRS 
has also not institutionalized the use of enforcement revenue 
accounting data. 

Given the environment in which it operates, IRS cannot be expected to 
collect all taxes owed through enhancements to internal control alone. 
The level of uncollected taxes 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 
collection, 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. Successfully 
addressing its remaining control deficiencies will help position IRS to 
do so. 

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 57] 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 58] 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 2008 continued to find that IRS did 
not always timely release all tax liens where the taxpayer had paid in 
full or was otherwise relieved of a tax liability. 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 59] and we reviewed its test 
results. For fiscal year 2008, 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 2008, 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 33 days to more than 494 
days. On the basis of its sample, IRS estimated that for about 12 
percent of unpaid tax assessment cases resolved in fiscal year 2008 for 
which it had filed a tax lien, it did not release the lien within 30 
days.[Footnote 60] 

Various processing delays resulted in IRS not releasing these liens 
timely. In one case, IRS had not entered data on the existence of a 
lien onto the taxpayer’s master file account until after the taxpayer 
had fully paid the tax liability. Since the taxpayer’s account balance 
had already been updated to reflect payment, there was no payment 
activity after the lien had been posted to trigger the lien release. In 
another case, a taxpayer had two separate accounts in IRS’s master file 
for the same tax liability. When IRS filed a lien against the taxpayer, 
it posted the lien to both accounts. After the taxpayer paid the 
balance of taxes owed in full, IRS initiated the lien release on only 
one of the accounts. In the two cases above, IRS only discovered its 
error and initiated the lien releases as a result of its A-123 review. 
In two other cases, IRS entered into an offer-in-compromise (OIC) with 
taxpayers but did not promptly take the necessary steps to release its 
liens after receiving the agreed upon payments. In another case, IRS 
did not timely update the taxpayer’s master file account to reflect 
that the tax debt had been discharged in bankruptcy court. In still 
another case, IRS made a data entry error when entering the taxpayer’s 
satisfying payment information into the taxpayer’s account. Due to the 
error, the master file rejected the data and IRS had to subsequently re-
enter the information. This delayed the posting of the satisfying 
payment to the taxpayer’s account, which in turn delayed the initiation 
of the lien release. In a final example, IRS received the taxpayer’s 
satisfying payment just prior to the annual 3-week period during which 
IRS was scheduled to perform maintenance on its master files. During 
this period, IRS could not record the payment in the taxpayer’s master 
file account, which delayed the initiation of the lien release process. 
This delay, in turn, resulted in IRS releasing the lien more than 30 
days after receipt of the satisfying payment. However, the delay in 
this case exceeded the 30 day limit by only 3 days. 

These issues are similar to those we reported in prior audits. 
[Footnote 61] We issued a report in May 2007 that discussed factors 
contributing to IRS’s failure to timely release federal tax liens and 
made recommendations to address those issues.[Footnote 62] IRS has not 
yet completed actions to fully address all of these recommendations. 
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 2008, 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 
Federal Financial Management Systems Requirements (FFMSR), federal 
accounting standards (U.S. generally accepted accounting principles), 
and the SGL at the transaction level. In its Federal Managers’ 
Financial Integrity Act of 1982 assurance statement to Treasury, IRS 
also reported that its financial management systems did not 
substantially comply with the requirements of FFMIA in fiscal year 
2008. 

IRS’s core general ledger system for tax-related activities, IRACS, 
does not conform to the requirements of FFMSR, which are embodied in 
OMB Circular No. A-127, and also does not comply with the SGL at the 
transaction level. Specifically, as we noted earlier in this report, 
IRS continues to lack transaction traceability for taxes receivable, 
which in fiscal year 2008 was again the product of a complex 
statistical estimation process and was not recorded in IRACS, although 
it accounted for over 81 percent of the assets reported by IRS on its 
balance sheet as of September 30, 2008. IRACS also does not post 
transactions in conformance with SGL posting models. In addition, 
material weaknesses in information security controls continue to 
threaten the confidentiality, integrity, and availability of IRS’s 
financial processing systems and information. In fiscal year 2008, we 
continued to identify weaknesses in controls for protecting access to 
systems and information, as well as other information security controls 
that affect IRS’s key financial systems, specifically IFS and IRACS. A 
key reason for the presence of these information security weaknesses in 
IRS’s financial systems is that IRS has not yet fully implemented a 
security program to ensure that controls are effectively established 
and maintained. 

IRS’s financial management systems do not comply with federal 
accounting standards because IRS did not have reliable, current 
information on the costs of its activities available to support 
decision making on a routine basis, consistent with Statement of 
Federal Financial Accounting Standards No 4, Managerial Cost 
Accounting. Although IRS believes its recently completed cost pilots 
have demonstrated its ability to do so, IRS has not applied the cost 
information maintained in the cost module of IFS to the tax related 
activities processed by separate legacy information systems. IRS’s 
financial management systems also do not comply with federal accounting 
standards because, as discussed previously, IRS has three material 
weaknesses in its internal control. 

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 non-tax 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 non-tax 
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, IRS has completed 
several pilot projects intended to explore ways of addressing this 
issue, but has not yet applied what has been learned to determining the 
full cost of its program activities. 

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 these actions are long-term in nature and are 
tied to IRS’s systems modernization efforts. OMB continuously monitors 
IRS’s progress in remediating its systems deficiencies.[Footnote 63] 

[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 assessments, revenue, refunds, 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 IRS and its operations, including its 
internal control related to financial reporting (including safeguarding 
assets) and compliance with laws and regulations (including the 
execution of transactions in accordance with budget authority). 

* We tested relevant internal control over financial reporting 
(including safeguarding assets) and compliance, and evaluated the 
design and operating effectiveness of internal control. 

* We considered IRS’s process for evaluating and reporting on internal 
control 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(a)); Release of lien (26 U.S.C. § 6325 (a)); Interest on 
underpayment, nonpayment, or extension 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); General rule on deposit of 
internal revenue collections (26 U.S.C. § 7809(a); Interest penalties 
under the Prompt Payment Act (31 U.S.C. § 3902(a), (b), and (f); 
Limitations on discount payments under the Prompt Payment Act (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(c)(1)(A)); Social Security Act of 1935, 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); Financial 
Services and General Government Appropriations Act, 2008, Pub. L. No. 
110-161, div. D, tit. I, 121 Stat. 1844 (Dec. 26, 2007); 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); Economic Stimulus Act of 2008, Pub. L. No. 110-185, 122 Stat. 
613 (Feb. 13, 2008). 

* 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); (reprinted in 31. 
U.S.C. § 3512 note). 

[End of section] 

Appendix III: Comments from the Internal Revenue Service: 

Department Of The Treasury: 
Internal Revenue Service: 
Commissioner: 
Washington, D.C. 20224: 

November 5, 2008: 

Mr. Steven J. Sebastian: 
Director: 
Financial Management and Assurance: 
U.S. Government Accountability Office: 
441 G Street, N.W. 
Washington, D.C. 20548: 

Dear Mr. Sebastian: 

Thank you for the opportunity to comment on the draft report titled, 
Financial Audit: IRS's Fiscal Years 2008 and 2007 Financial Statements. 
We are pleased that the Internal Revenue Service (IRS) received an 
unqualified opinion on the combined financial statements for the ninth 
consecutive year. The unqualified opinion demonstrates that the IRS 
accurately accounts for approximately $2.7 trillion in tax revenue 
receipts, $426 billion in tax refunds, and $11 billion in IRS 
appropriated funds. 

We also are pleased that the Government Accountability Office (GAO) 
recognizes the significant accomplishments the IRS made this year in 
addressing its financial management challenges and material weaknesses 
in internal controls. As a result of the IRS progress, GAO no longer 
considers the remaining issues over the collection of tax revenues and 
the issuance of improper refunds to be a material weakness. Further, 
GAO concluded that the remaining issues regarding the controls over 
hard-copy taxpayer receipts and data no longer constitute a significant 
deficiency. 

We are dedicated to continuing to improve financial management at the 
IRS, as evidenced by the following additional FY 2008 achievements: 

* Conducted A-123 activities by testing transaction processes material 
to Treasury's Consolidated Financial Statements, including 12 
administrative processes related to $10 billion in administrative 
transactions and five custodial tax processes related to $2.7 trillion 
in tax revenues. 

* Completed required Federal Information Security Management Act 
activities, including contingency plan testing on 247 applications and 
systems and live disaster recovery tests for all major applications. 

* Achieved a 35% reduction in Trust Fund Recovery Penalty (TFRP) cross 
reference errors using Custodial Detail Data Base (CDDB) reports and 
classified $27 billion (77%) of the $35 billion TFRP inventory. 

* Implemented a 20 digit trace-ID in all payment systems which enables 
CDDB to identify each individual tax revenue payment to support 
traceability to the Interim Revenue Accounting Control System. 

* Completed the necessary actions to support a downgrade of the Federal 
Managers' Financial Integrity Act Material Weakness for Earned Income 
Tax Credit. 

Improving information security continues to be a priority for the IRS. 
The IRS established the Office of Online Fraud Detection and Prevention 
to address increasing and evolving threats online affecting both the 
IRS and taxpayers. We also completed a corrective action plan to 
address information technology security training, systems auditing, 
access controls, system security configuration control, and systems 
disaster recovery. We continue risk assessments of business processes 
to address identity protection and analyzed the use of social security 
numbers for reduction and elimination where possible. 

I want to recognize GAO'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: 

Douglas H. Shulman: 

[End of section] 

Footnotes: 

[1] The term enforcement revenue refers to the tax revenue received as 
a result of IRS’s tax collection actions—enforcement—taken against 
taxpayers who do not voluntarily pay their taxes when due. 

[2] GAO, Financial Audit: IRS’s Fiscal Years 2007 and 2006 Financial 
Statements, [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-08-166] 
(Washington, D.C.: Nov. 9, 2007). 

[3] GAO, High-Risk Series: An Overview, [hyperlink, 
http://www.gao.gov/cgi-bin/getrpt?GAO/HR-95-1] (Washington, D.C.: Feb. 
1995). 

[4] GAO, High-Risk Series: An Update, [hyperlink, 
http://www.gao.gov/cgi-bin/getrpt?GAO-07-310] (Washington, D.C.: Jan. 
2007). 

[5] GAO, Financial Audit: Examination of IRS’ Fiscal Year 1992 
Financial Statements, [hyperlink, http://www.gao.gov/cgi-
bin/getrpt?GAO/AIMD-93-2] (Washington, D.C.: June 30, 1993). 

[6] [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-07-310]. 

[7] 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. 

[8] 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). 

[9] 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. 

[10] 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. 

[11] 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. 

[12] One exception is the Earned Income Tax Credit program for which 
IRS has developed such metrics. 

[13] Lockbox banks are commercial banks that operate under contract 
with the Financial Management Service to provide tax receipt processing 
and deposit services on behalf of IRS. 

[14] 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. 

[15] On the basis of federal accounting standards, unpaid tax 
assessments are classified into one of the following three categories: 
(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 federal taxes 
receivable, net of an allowance for uncollectible accounts, are 
reported on the financial statements. 

[16] EFTPS is an automated tax payment system that allows taxpayers to 
make federal tax payments electronically, and processes deposit data 
related to payroll and other taxes paid by federal agencies through the 
Federal Agency Tax Payments and Returns II System. By law, businesses 
with employment or other depository taxes that exceed $200,000 annually 
are required to use EFTPS. 26 U.S.C. § 6302(h), 26 C.F.R. § 1-6302(h). 

[17] Pub. L. No. 110-185, § 101, 122 Stat. 613, 613-17 (Feb. 13, 
2008)(codified at 26 U.S.C. § 6428). The act included provisions to 
help stimulate the economy, such as the 2008 disbursement to eligible 
taxpayers of recovery rebates (i.e., tax refunds) of up to $600 for 
individuals and $1,200 for couples, with an additional $300 for each 
child. Pursuant to the act, IRS disbursed refunds totaling about $94 
billion, or about 22 percent of all refunds disbursed by IRS during 
fiscal year 2008. 

[18] See Government Paperwork Elimination Act, Pub. L. No. 105-277, 
div. C, tit. XVII, 112 Stat. 2681, 2681-749 (Oct. 21, 1998)(codified at 
44 U.S.C. § 3504); see also 65 Fed. Reg. 25,508 (May 2, 2000), and OMB 
procedures and guidance to implement the Government Paperwork 
Elimination Act. 

[19] GAO, Internal Revenue Service: Status of GAO Financial Audit and 
Related Financial Management Report Recommendations, [hyperlink, 
http://www.gao.gov/cgi-bin/getrpt?GAO-08-693] (Washington, D.C.: July 
2, 2008). 

[20] 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). 

[21] Pub. L. No. 104-208, div. A, § 101(f), title VIII, 110 Stat. 3009, 
3009-389 (Sept. 30, 1996). 

[22] OMB, 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. 

[23] JFMIP was originally formed under the authority of the Budget and 
Accounting Procedures Act of 1950 as a cooperative undertaking of OMB, 
Treasury, 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. 

[24] GAO, Financial Audit: IRS’s Fiscal Years 2007 and 2006 Financial 
Statements, [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-08-166] 
(Washington, D.C.: Nov. 9, 2007). 

[25] [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-08-166]. 

[26] EFTPS is an automated tax payment system that allows taxpayers to 
make federal tax payments electronically, and processes deposit data 
related to payroll and other taxes paid by federal agencies through the 
Federal Agency Tax Payments and Returns II System. By law, businesses 
with employment or other depository taxes that exceed $200,000 annually 
are required to use EFTPS. 26 U.S.C. § 6302(h), 26 C.F.R. § 1-6302(h). 

[27] IRS reports federal taxes receivable on its balance sheet, net of 
an allowance for amounts considered uncollectible. 

[28] This issue is discussed in more detail in the material weakness in 
controls over unpaid tax assessments section of this report. 

[29] OMB, Circular No. A-127, Financial Management Systems (Washington, 
D.C.: Dec. 1, 2004). FFMSR require application of the SGL at the 
transaction level and states that conformance requires, among other 
items, that transaction detail for SGL accounts be readily available in 
the financial management system and be traceable to specific SGL 
account codes. 

[30] Automated Underreporter is an IRS program that compares 
information on tax returns to related information submitted 
electronically by third parties to identify potential unreported 
taxable income. Field Assistance is the IRS office that manages 
Taxpayer Assistance Centers located throughout the country. These 
centers are designed to provide comprehensive face-to-face assistance 
to taxpayers as well as assistance through telephone and written 
correspondence. Submission processing is the data processing arm of 
IRS. These units process paper and electronic submissions at IRS 
service center campuses. This includes depositing tax payments, 
correcting errors, and forwarding data to IRS’s computing centers for 
analysis and posting to taxpayer accounts. 

[31] Abatements are reductions in tax assessments and are a normal part 
of IRS’s tax administration process. Abatements may occur for a number 
of reasons. For example, a taxpayer may file an amended return claiming 
a lower tax liability than previously reported or a qualifying 
corporation may claim a net operating loss which created a credit that 
can be carried back to reduce a prior year’s tax liability. 

[32] Federal taxes receivable are taxes due from taxpayers for which 
IRS can support the existence of a receivable through taxpayer 
agreement or a favorable court ruling. Compliance assessments are 
assessments where neither the taxpayer nor the court has affirmed that 
the amounts are owed. Write-offs 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 financial statements. IRS also 
categorizes certain unpaid assessments into a fourth category referred 
to as memo. IRS places accounts into this category when they do not 
meet any of the other three unpaid assessment categories. 

[33] 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. 

[34] For tax year 2007, the lifetime unified tax credit reduced or 
eliminated tax liability for taxable gifts below the $1 million 
exclusion amount. This means taxpayers can make up to $1 million in 
taxable gifts over their lifetime without having to pay the gift tax. 
See 26 U.S.C. § 2505; see also IRS Publication 950, Introduction to 
Estate and Gift Taxes (rev. Sept. 2008). 

[35] 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 (May 14, 2008). 

[36] [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-08-166]. 

[37] GAO, Financial Audit: IRS’s Fiscal Years 2006 and 2005 Financial 
Statements, [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-07-136] 
(Washington, D.C.: Nov. 9, 2006); Management Report: Improvements 
Needed in IRS’s Internal Controls, GAO-07-689R (Washington, D.C.: May 
11, 2007). 

[38] IRS defines a defunct business as one that is no longer operating 
and does not have any assets IRS can levy to pay off some or all of the 
business’s outstanding tax debt. 

[39] An offer-in-compromise is an agreement between a taxpayer and IRS 
that resolves the taxpayer’s tax debt by accepting less than full 
payment. See 26 U.S.C. § 7122, 26 C.F.R. § 601.203. 

[40] This issue is discussed further in the Compliance Issues section 
of this report. 

[41] Treasury Inspector General for Tax Administration, Inadequate 
Security Controls Over Routers and Switches Jeopardize Sensitive 
Taxpayer Information, 2008-20-071 (Washington, D.C.: Mar. 26, 2008). 

[42] Treasury Inspector General for Tax Administration, The Internal 
Revenue Service Deployed Two of Its Most Important Modernized Systems 
With Known Security Vulnerabilities, 2008-20-163 (Washington, D.C.: 
Sept. 24, 2008). 

[43] According to the TIGTA report, AMS will provide IRS employees 
faster and improved access to taxpayer account data, which will 
minimize taxpayer interaction and provide more timely responses to and 
resolution of taxpayer inquiries. Initiated in August 2006, the AMS 
project is scheduled to cost more than $700 million to develop, 
operate, and maintain through calendar year 2024. The first release of 
AMS, deployed in October 2007, was limited to achieving address changes 
in the CADE environment. 

[44] 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). The agency information 
security program requirement is codified at 44 U.S.C. § 3544(b). 

[45] [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-08-166]. 

[46] Lockbox banks are commercial banks that operate under contract 
with the Financial Management Service to provide tax receipt processing 
and deposit services on behalf of IRS. 

[47] One exception is the Earned Income Tax Credit program for which 
IRS has developed such metrics. 

[48] The term enforcement revenue refers to the tax revenue received as 
a result of IRS’s tax collection actions—enforcement—taken against 
taxpayers who do not voluntarily pay their taxes when due. 

[49] Process-oriented measures used by IRS include elements such as 
taxes assessed, the number of each type of case that is worked on and 
the number of cases closed. For example, IRS uses process measures 
related to the Automated Underreporter Program (AUR), which is designed 
to identify under-reported income by matching taxpayer-reported 
information against information submitted to IRS by third parties, such 
as interest or dividend information submitted by financial 
institutions. IRS’s current AUR performance measures focus on the 
number of additional tax assessments made, number of taxpayer returns 
examined and number of cases closed, rather than measuring the extent 
of collections received. 

[50] GAO, Internal Revenue Service: Serious Weaknesses Impact Ability 
to Report on and Manage Operations, [hyperlink, http://www.gao.gov/cgi-
bin/getrpt?GAO/AIMD-99-196] (Washington, D.C.: Aug. 9, 1999). 

[51] GAO, Internal Revenue Service: Status of GAO Financial Audit and 
Related Financial Management Report Recommendations, [hyperlink, 
http://www.gao.gov/cgi-bin/getrpt?GAO-08-693] (July 2, 2008). 

[52] GAO, Tax Debt Collection: IRS Has a Complex Process to Attempt to 
Collect Billions of Dollars in Unpaid Tax Debts, [hyperlink, 
http://www.gao.gov/cgi-bin/getrpt?GAO-08-728] (Washington, D.C.: June 
13, 2008). 

[53] GAO, Tax Compliance: Businesses Owe Billions in Federal Payroll 
Taxes, [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-08-617] 
(Washington, D.C.: July 25, 2008). Payroll taxes are amounts employers 
withhold from employees’ wages for federal income taxes, Social 
Security, and Medicare, as well as the employers’ mandatory matching 
contributions for Social Security and Medicare taxes. 

[54] [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-08-728]. 

[55] Internal Revenue Service Restructuring and Reform Act of 1998, 
Pub. L. No. 105-206, § 1204, 112 Stat. 681, 722 (July 22, 
1998)(reprinted in 26 U.S.C. § 7804 note). 

[56] See Regulation 801 (26 C.F.R. pt. 801), Balanced System for 
Measuring Organizational and Employee Performance Within the Internal 
Revenue Service (Oct. 17, 2005); Internal Revenue Manual, § 1.5.2, 
Managing Statistics in a Balanced Measurement System: Uses of 
Statistics (Apr. 1, 2007). For example, Regulation 801 states “Modern 
management practice and various statutory and regulatory provisions 
require the IRS to set performance goals for organizational units and 
to measure the results achieved by those units with respect to those 
goals.” 26 C.F.R. § 801.1T(a)(2). 

[57] 26 U.S.C. §§ 6321, 6323. 

[58] [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-08-166]. 

[59] 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. On the basis of this assessment, agency management is 
required to prepare an assurance statement on the effectiveness of 
internal control 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. 

[60] IRS reports it is 95 percent confident that the percentage of 
cases in which the lien was not released within 30 days does not exceed 
21 percent. 

[61] [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-08-166]. 

[62] GAO, Management Report: Improvements Needed in IRS’s Internal 
Controls, [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-07-689R] 
(Washington, D.C.: May 11, 2007). 

[63] When the planned resolution period exceeds FFMIA’s standard 3-year 
period, section 803(c)(4) of FFMIA requires that Treasury, with the 
concurrence of the Director of OMB, specify the most feasible date for 
bringing its systems into substantial compliance with the three FFMIA 
systems requirements and designate a Treasury official who shall be 
responsible for bringing its systems into substantial compliance by 
that date. 

[End of section] 

GAO's Mission: 

The Government Accountability Office, the audit, evaluation and 
investigative arm of Congress, exists to support Congress in meeting 
its constitutional responsibilities and to help improve the performance 
and accountability of the federal government for the American people. 
GAO examines the use of public funds; evaluates federal programs and 
policies; and provides analyses, recommendations, and other assistance 
to help Congress make informed oversight, policy, and funding 
decisions. GAO's commitment to good government is reflected in its core 
values of accountability, integrity, and reliability. 

Obtaining Copies of GAO Reports and Testimony: 

The fastest and easiest way to obtain copies of GAO documents at no 
cost is through GAO's Web site [hyperlink, http://www.gao.gov]. Each 
weekday, GAO posts newly released reports, testimony, and 
correspondence on its Web site. To have GAO e-mail you a list of newly 
posted products every afternoon, go to [hyperlink, http://www.gao.gov] 
and select "E-mail Updates." 

Order by Phone: 

The price of each GAO publication reflects GAO’s actual cost of
production and distribution and depends on the number of pages in the
publication and whether the publication is printed in color or black and
white. Pricing and ordering information is posted on GAO’s Web site, 
[hyperlink, http://www.gao.gov/ordering.htm]. 

Place orders by calling (202) 512-6000, toll free (866) 801-7077, or
TDD (202) 512-2537. 

Orders may be paid for using American Express, Discover Card,
MasterCard, Visa, check, or money order. Call for additional 
information. 

To Report Fraud, Waste, and Abuse in Federal Programs: 

Contact: 

Web site: [hyperlink, http://www.gao.gov/fraudnet/fraudnet.htm]: 
E-mail: fraudnet@gao.gov: 
Automated answering system: (800) 424-5454 or (202) 512-7470: 

Congressional Relations: 

Ralph Dawn, Managing Director, dawnr@gao.gov: 
(202) 512-4400: 
U.S. Government Accountability Office: 
441 G Street NW, Room 7125: 
Washington, D.C. 20548: 

Public Affairs: 

Chuck Young, Managing Director, youngc1@gao.gov: 
(202) 512-4800: 
U.S. Government Accountability Office: 
441 G Street NW, Room 7149: 
Washington, D.C. 20548: