Internal Revenue Service:

Custodial Financial Management Weaknesses

AIMD-99-193: Published: Aug 4, 1999. Publicly Released: Aug 4, 1999.

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Pursuant to a legislative requirement, GAO provided information on the internal control and compliance issues related to the Internal Revenue Service's (IRS) custodial activities, focusing on: (1) previously reported internal control and compliance issues and related recommendations; (2) new issues identified during GAO's fiscal year (FY) 1998 financial audit, along with new recommendations to address those issues; and (3) additional issues identified from GAO's ongoing FY 1999 financial audit.

GAO noted that: (1) IRS continues to have a broad range of serious internal control weaknesses that have resulted in disbursements of fraudulent and other questionable tax refunds, unnecessary burden to taxpayers resulting from taxpayer receipts stolen by IRS employees, and errors or delays in posting payments to taxpayer accounts; (2) these control weaknesses fall into five major areas: (a) unpaid assessments; (b) security over receipts and taxpayer information; (c) refunds and earned income tax credits; (d) revenue reporting and distribution; and (e) financial reporting; (3) some weaknesses are long-standing, having been reported since GAO's first audit of IRS' financial statements in FY 1992; (4) in addition, GAO has found that some weaknesses are more pervasive than GAO previously reported; (5) until IRS corrects these weaknesses, these conditions will adversely impact IRS' ability to provide quality customer service; (6) IRS has acknowledged the seriousness of its financial management problems and the Commissioner has committed to making necessary improvements; (7) although some needed improvements can be achieved in the short term, GAO recognizes that for many weaknesses, systems modernization will need to be part of a long-term solution; (8) IRS has begun--and in some cases, completed--actions to address some of these problems; (9) for example, in the short term, IRS is developing and implementing various security procedures to better safeguard cash, checks, and taxpayer data; (10) these procedures include purchasing and installing equipment that, if properly linked with the Federal Bureau of Investigation, will provide fingerprint check results before new employees report to duty; (11) however, GAO recognizes that addressing other critical recommendations, such as the system deficiencies affecting IRS' ability to effectively manage and report on its unpaid assessments, will require system modifications that could take years to fully implement; (12) such long-term efforts will require sustained senior management commitment in order for IRS to have sound financial management; (13) IRS acknowledged the magnitude of its system deficiencies and internal control weaknesses in comments on this report; and (14) it noted that it was working on many of the matters that can be addressed in the short term, but recognized the long-term challenges posed by many of these issues and the need to factor them into its system modernization plans.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: Over the past several years, IRS determined several factors causing delays and took a series of actions to improve the timeliness of processing and posting TFRP assessments. IRS updated the Internal Revenue Manual to establish specific timeframes for achieving critical milestones in processing TFRP assessments. These milestones include a maximum number of days that IRS staffs are given to (1) determine whether to pursue TFRP assessments against responsible business officers, (2) submit a case file for managerial approval of the recommended TFRP assessment, (3) review the case file, and (4) post the assessment to the responsible business officer's tax account. IRS has also established time frames for segments of the TFRP assessment process not currently covered in its IRM, and is working to finalize these criteria in the IRM. Additionally IRS completed the nationwide implementation of the Automated Trust Fund Recovery - Area Office (ATFR-AO) application, which among other things, facilitates the timely and accurate processing of TFRP assessments by automating the calculation of trust fund penalties. Furthermore, IRS developed several reports to help managers monitor the progress of TFRP assessment cases being processed.

    Recommendation: To address delays in posting trust fund recovery penalty assessments, IRS should analyze and determine the factors causing delays in processing and posting all such assessments. Once these factors have been determined, IRS should develop procedures to reduce the impact of these factors to ensure timely posting to all applicable accounts and proper offsetting of refunds against unpaid trust fund recovery penalty assessments before issuance.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  2. Status: Closed - Implemented

    Comments: GAO confirmed that IRS updated the IRM to state that installment agreements must stipulate full payment for liabilities. During fiscal year 2001, GAO noted no instances of noncompliance with the Internal Revenue Code related to installments agreements. GAO will continue to evaluate IRS's compliance during its fiscal year 2002 financial audit of IRS.

    Recommendation: To ensure compliance with Section 6159 of the Internal Revenue Code, IRS should identify and institute procedures to monitor compliance of installment agreements. Such monitoring should ensure that the installment agreements provide for full payment of the taxes owed. For example, management could randomly select installment agreements from all of its units to review for compliance with the code.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  3. Status: Closed - Implemented

    Comments: According to IRS, its field offices continue to provide training and perform reviews to strengthen controls over remittances. Its Small Business/Self-Employed (SB/SE) business division updated guidance and instructions to Collection Field function employees about overstamping checks made out to "IRS" or "Internal Revenue Service" with "United States Treasury." The instructions also require the Submission Processing (SP) to send a teller error advice through the Revenue Officer group manager to address remittance errors. The Tax Exempt/Government Entity (TE/GE) business division covered remittance processing procedures during the new hire workshops and included text in the fiscal year 2009 Revenue Agent CPE. In 2009, the Large and Mid-sized Business (LMSB) business division issued its annual executive memorandum to all IRS field offices on the use of Form 3210 procedures, and incorporated information on Form 3210 procedures along with the proper procedure for overstamping of checks made out to the "IRS" with "United States Treasury" in the "Processing Advance Payments and Deposits" job aid module for new hires. GAO has confirmed that IRS has taken several actions to address this recommendation and improve its review of deterrent controls at its field offices. During GAO's audit of IRS's fiscal year 2009 financial statements, it did not find any instances of physical security control weaknesses over courier security, safeguarding of receipts in locked containers, requirements for fingerprinting employees, and requirements for promptly overstamping checks made out to "IRS" with "Internal Revenue Service" or "United States Treasury" at the field offices it visited. Therefore, GAO is closing this recommendation.

    Recommendation: To address weaknesses in controls over taxpayer data and receipts at IRS district offices and posts-of-duty, IRS should expand the current review of service center deterrent controls to include similar reviews of controls at IRS district offices and posts-of-duty in areas such as courier security, safeguarding of receipts in locked containers, requirements for fingerprinting employees and requirements for promptly over-stamping checks made out to "IRS" with "Internal Revenue Service" or "United States Treasury." Based on the results, IRS should make appropriate changes to strengthen its controls at these locations.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  4. Status: Closed - Implemented

    Comments: IRS developed revised security standards and processing procedures for lock-box banks for calendar year 2002. These include new standards for physical security, courier service, and background standards. While further refinements are needed to the courier service standards, IRS's actions effectively address the recommendation.

    Recommendation: To improve controls at IRS lockbox banks, IRS should work with the Financial Management Service to revise the lockbox contracts to specifically require that: (1) background checks be completed before employees begin working; (2) temporary employees be subjected to background checks that are consistent with those required of IRS employees; and (3) taxpayer data and receipts in transit from the lockbox banks are appropriately protected.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  5. Status: Closed - Implemented

    Comments: IRS implemented new procedures in fiscal year 2000, for all service centers requiring that receipts be given for all payments made by taxpayers, regardless of the method of payment. During fiscal year 2000, GAO noted that service centers visited generally issued receipts for all types of payments and that signs were posted reminding taxpayers to request receipts.

    Recommendation: To reduce the vulnerability of walk-in payments to being lost or stolen, IRS should require service center staff to provide receipts to all walk-in taxpayers regardless of the method of payment. In addition, IRS should post signs reminding taxpayers to request receipts. At service centers not normally equipped to receive walk-in payments, all receipts should be logged in to ensure completeness and accuracy of receipts and deposits.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  6. Status: Closed - Implemented

    Comments: During fiscal year 1999, IRS implemented additional procedures at the Cincinnati Service Center Campus to expedite the processing of Form 720 Excise Tax returns over $1 million. During its reviews in fiscal years 2000 and 2001, GAO noticed a significant reduction in large tax returns that were not included in the proper quarterly excise tax trust fund certifications for the Airport and Airway Trust Fund and the Highway Trust Fund.

    Recommendation: To address delays in recording excise tax returns, IRS should establish procedures to ensure the prompt recording of tax returns. IRS should implement controls to ensure that excise tax returns are recorded timely and included in the quarterly excise tax trust fund certifications.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  7. Status: Closed - Implemented

    Comments: IRS augmented its Modernization & Information Technology Services staff, and cross-trained employees to increase the appropriate depth of experience to perform the master file extractions and other ad hoc procedures for financial reporting purposes. Modernization & Information Technology Services reduced the Assembler Language Code programmer shortages and increased contractor support by 17 percent. IRS also continues to expand the use of CDDB during the annual audit, and the addition of trained Modernization & Information Technology Services and contractor staff ensures development of reliable balances for financial reporting purposes on a continuing basis. IRS hired additional staff in the Custodial Accounting Branch, which has responsibility for the custodial financial statements. Also, employees were cross-trained and current systems expanded to better support the financial reporting of revenue, refunds, and unpaid assessments. In addition, IRS reduced its shortage of assembly language programmers by holding training classes for employees.

    Recommendation: As a short-term action, IRS should ensure that additional staff are employed and existing staff appropriately cross-trained to be able to perform the master file extractions and other ad hoc procedures needed for IRS to develop reliable balances for financial reporting purposes on a continuing basis.

    Agency Affected: Department of the Treasury: Internal Revenue Service


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