Internal Revenue Service: Serious Weaknesses Impact Ability to Report on and Manage Operations
AIMD-99-196
Published: Aug 09, 1999. Publicly Released: Aug 09, 1999.
Skip to Highlights
Highlights
GAO followed up on its report on the Internal Revenue Service's (IRS) fiscal year (FY) 1998 financial statements.
Recommendations
Recommendations for Executive Action
| Agency Affected | Recommendation | Status |
|---|---|---|
| Internal Revenue Service | The Commissioner of Internal Revenue should direct the Chief Financial Officer to ensure that IRS promptly resolves differences between IRS and Treasury records of IRS' appropriation account balances and adjusts accounts accordingly. For example, reconciliations should be performed promptly every month, with Treasury and IRS amounts in agreement and reconciling items properly resolved. |
Closed – Implemented
IRS reported that it established a system in fiscal year 2000 to provide management oversight to assure that appropriation account balances are reconciled each month. GAO confirmed that IRS successfully implemented policies and procedures to promptly identify differences between IRS and Treasury records of IRS's appropriation account balances, and to appropriately resolve identified differences.
|
| Internal Revenue Service | The Commissioner of Internal Revenue should direct the Chief Financial Officer to strengthen control over IRS' operating funds by promptly investigating and clearing suspense account items. For example, outstanding amounts in the suspense account should be reviewed every month to try to resolve and clear outstanding balances. |
Closed – Implemented
In fiscal year 2000, IRS substantially reduced the amount and duration of transactions held in suspense compared to prior years. At fiscal year-end, GAO found no material transactions in the suspense account that were older than 1 year.
|
| Internal Revenue Service | To effectively manage and report on key balances, the Commissioner of Internal Revenue should direct the Chief Financial Officer to develop subsidiary records for accounts payable and undelivered orders and a list of current year nonpayroll operating expenses that will provide reliable accounts payable, undelivered orders, and nonpayroll operating expense data. This could include adding an indicator code when inputting transactions into the accounting system that will let IRS identify and eliminate offsetting transactions. In the long-term, it could include enhancements to IRS' financial systems to include the capability of routinely generating subsidiary records of outstanding accounts payable and undelivered order balances and a reliable list of current year nonpayroll operating expenses. |
Closed – Implemented
In fiscal year 2000, IRS provided the listings stated, although errors were still noted. For example, the listing of non-payroll operating expenses also erroneously included some property items. GAO closed this recommendation because of IRS's ability to generate these listings, but tracked the reliability of these listings and the implementation of subsidiary ledgers in another recommendation issued after the results of its audit of IRS's fiscal year 1999 financial statements (see GAO-01-42). IRS subsequently addressed these other issues and the related recommendation was also closed.
|
| Internal Revenue Service | The Commissioner of Internal Revenue should direct the Chief Financial Officer to develop the data to support meaningful cost information categories and cost-based performance measures. |
Closed – Implemented
IRS has taken several actions to address this recommendation and improve its cost accounting capability. For example, in fiscal year 2007, IRS developed and issued its first cost accounting policy to provide guidance on the concepts and requirements for managerial cost accounting within IRS. In addition, in fiscal year 2008, IRS (1) established an Office of Cost Accounting within its CFO, (2) completed several cost pilots to demonstrate its capability to use the cost data within IFS and the associated workload and production data from its business unit systems to calculate the full costs of its products, services, and programs, and (3) completed development of the return on investment for the Earned Income Tax Credit program that includes full cost information. However, IRS has not extended the cost pilot methodology to develop full cost information on the full range of IRS's programs. Nevertheless, to provide recommendations more closely aligned with the current status, GAO has closed this recommendation based on IRS's progress to date and has reported the remaining issues, along with related recommendations for corrective action, in a June 2009 Management Report. See report GAO-09-513R.
|
| Internal Revenue Service | The IRS should develop and implement procedures and controls to ensure that detailed P&E records are accurately maintained. These procedures and controls would include ensuring that physical inventories at field locations are effectively performed, including prompt resolution of discrepancies found in the inventories and appropriate adjustment of detailed records. |
Closed – Implemented
During fiscal year 2003, IRS implemented several remedies. Specifically, IRS developed procedures to use electronic data from vendors to create skeletal inventory records, developed and implemented a policy and procedures for updating inventory records for disposals, expanded use of network monitoring software to track assets, and enhanced monitoring and quality control over the annual inventory process. During fiscal year 2003, GAO noted significant improvement in the reliability of IRS's property and equipment inventory records.
|
| Internal Revenue Service | Because of inaccuracies in existing detailed P&E records and in order to provide an accurate starting point, the Commissioner of Internal Revenue should consider directing that a physical inventory of P&E be performed with adjustments being made to IRS' detailed records accordingly. To ensure that such efforts are not wasted, IRS first needs to establish and implement effective procedures to ensure that the accuracy of detailed P&E records, once corrected, is maintained. |
Closed – Implemented
GAO confirmed that annual physical inventories are now being performed. However, because of long-standing problems with its overall property system, IRS still cannot ensure the accuracy of its detailed records. GAO will continue to monitor the accuracy of IRS's property and equipment records under a related recommendation in GAO/AIMD-99-196.
|
| Internal Revenue Service | In conjunction with or shortly after a physical inventory, the Commissioner of Internal Revenue should direct that a systematic validation of the P&E amounts (valuation) for items in IRS' detailed records be performed. |
Closed – Implemented
IRS developed and implemented interim procedures to determine year-end balances for its P&E accounts until its new integrated financial system is implemented, currently targeted for March 2005.
|
| Internal Revenue Service | To address the likely understatement of reported P&E and improve the accuracy of information contained in the P&E records, the Commissioner of Internal Revenue should direct the Chief Financial Officer to develop a means to capture and capitalize all costs incurred to bring P&E to a form and location suitable for its intended use in accordance with Statement of Federal Financial Accounting Standards Number 6, including the design and installation costs and the costs of externally developed software. |
Closed – Implemented
IRS implemented an interim process for reporting the full cost of P&E at fiscal year-end until its integrated financial system is implemented. GAO is continuing to track IRS's efforts to implement the new integrated financial system under a related recommendation in this report.
|
| Internal Revenue Service | In the long-term, to address the system deficiencies affecting IRS' ability to effectively manage and report on its P&E balances, the Commissioner of Internal Revenue should direct that enhancements be made to IRS' financial systems to include recording P&E and capital leases as assets when purchased and to generate detailed records for P&E that reconcile to the financial records. |
Closed – Implemented
Since 1999, IRS has continued to make improvements toward addressing this recommendation through the implementation of various IRS systems. In 1999, IRS implemented the Automated Financial System (AFS) whereby all transactions were posted to expense accounts at a detailed level and then reclassified to asset accounts at a summary level. In October 2004, IRS implemented the Integrated Financial System (IFS) in which IRS posts directly to its asset accounts. Additionally, IRS maintains detailed records of asset purchases with current year asset and expense database files. We confirmed that over the years, IRS has improved its financial systems so that IRS records P&E and capital leases when purchased and it maintains detailed P&E records. However, our Financial Statement audits continue to find that these property records do not always reconcile to the financial records. In order to provide a recommendation more closely aligned with the current status of the remaining issues to be resolved, we are closing this recommendation based on IRS's progress to date and have reported the remaining issue, along with a related recommendation for corrective action in our June 2011 management report (see recommendation no. 11-26 in report GAO-11-536).
|
| Internal Revenue Service | IRS can improve its financial reporting process by ensuring that appropriate supervisory and management review of its financial statements and operations occurs. The Commissioner of Internal Revenue should direct that additional knowledgeable staff are employed or that existing staff are appropriately cross-trained to be able to develop IRS' financial statements and perform its accounting and financial functions or are able to perform the necessary supervision needed to obtain reliable and supportable financial data on time. |
Closed – Implemented
Hiring and training has been completed for additional staff to work on financial statement preparation, and accounting and financial functions. GAO confirmed that individuals have been hired and put in place to develop IRS's financial statements and to perform accounting and financial functions.
|
| Internal Revenue Service | To address IRS' deficiencies in its accounting and financial reporting processes, the Commissioner of Internal Revenue should direct the Chief Financial Officer to establish procedures for the financial statements to undergo review at the appropriate levels within the Chief Financial Officer's office, with documented evidence of the reviews. |
Closed – Implemented
IRS developed an evaluation process to include two levels of management review in the CFO organization. While GAO identified errors and omissions in the draft fiscal year 2001 financial statements, indicating IRS's actions not been effectively implemented, in later audits, GAO found that the evaluation process improved the form, content, and reliability of drafts of IRS's financial statements.
|
| Internal Revenue Service | To address the likely understatement of reported P&E and improve the accuracy of information contained in the P&E records, the Commissioner of Internal Revenue should direct the Chief Financial Officer to revise the capitalization policy to ensure that material P&E acquisitions are not expensed. |
Closed – Implemented
IRS's Chief Financial Officer issued a policy announcement that documented capitalization guidance for P&E.
|
| Internal Revenue Service | To address the likely understatement of reported P&E and improve the accuracy of information contained in the P&E records, the Commissioner of Internal Revenue should direct the Chief Financial Officer to review all lease agreements to determine whether they meet the criteria for capital leases and capitalize and properly record any leases that meet the criteria. |
Closed – Implemented
IRS reported that contracting officers are required to notify the CFO's office of all new lease acquisitions with total payments in excess of $50,000, so that the CFO's office can determine whether they represent capital leases. IRS also reported that in November 2000, the CFO's office completed reviewing documentation for all leased assets acquired in fiscal year 2000. However, GAO found that IRS hired a contractor to review the lease agreements, and that IRS continued to lack a systematic process to ensure that capital leases are properly identified and recorded.
|
Full Report
Office of Public Affairs
Topics
Accounting proceduresAuditing standardsFederal agency accounting systemsFinancial managementFinancial recordsFinancial statement auditsInternal controlsInventory controlReporting requirementsTax administration systems