Financial Audit: IRS Significantly Overstated Its Accounts Receivable Balance
AFMD-93-42
Published: May 06, 1993. Publicly Released: May 06, 1993.
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Highlights
Pursuant to a legislative requirement, GAO reviewed the Internal Revenue Service's (IRS) accounts receivable, focusing on: (1) the validity of IRS-reported accounts receivable balance as of June 30, 1991, and the potential effect of related accounting improvement efforts; and (2) the IRS methodology for calculating its allowance for doubtful accounts.
Recommendations
Recommendations for Executive Action
| Agency Affected | Recommendation | Status |
|---|---|---|
| Internal Revenue Service | The Commissioner of Internal Revenue should provide the IRS CFO authority to ensure that IRS accounting system development efforts meet its financial reporting needs. At a minimum, CFO approval of related system designs should be required. |
The CFO is responsible for approving systems development efforts related to revenue accounting.
|
| Internal Revenue Service | The Commissioner of Internal Revenue should direct CFO to take steps to ensure the accuracy of the balances reported in IRS financial statements. In the long term, this will require modifying IRS systems so that they are capable of: (1) identifying which assessments currently recorded in the Master File System represent valid receivables; and (2) designating new assessments that should be included in the receivables balance as they are recorded. Until these capabilities are implemented, IRS should rely on statistical sampling to determine what portion of its assessments represent valid receivables. |
For financial reporting purposes, IRS has developed and implemented a statistical sampling method that will determine those unpaid assessments that represent taxes receivable. However, GAO has made additional recommendations to further address this problem.
|
| Internal Revenue Service | The Commissioner of Internal Revenue should clearly designate CFO as the official responsible for coordinating the development of performance measures related to receivables and for ensuring that IRS financial reports conform with applicable accounting standards. |
The CFO is fully involved in developing performance measures for accounts receivable.
|
| Internal Revenue Service | The Commissioner of Internal Revenue should direct CFO to modify the IRS methodology for assessing the collectibility of its receivables by including only valid accounts receivables in the analysis. |
Although IRS has not developed written procedures for assessing the collectibility of its receivables, it followed the methodology that GAO recommended in the report and reported an estimate of valid receivables of $71 billion and collectible receivables of $29 billion in its September 30, 1993, financial statements.
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| Internal Revenue Service | The Commissioner of Internal Revenue should direct CFO to modify the IRS methodology for assessing the collectibility of its receivables by eliminating, from the gross receivables balance, assessments determined to have no chance of being collected. |
Although IRS has not developed written procedures for assessing the collectibility of its receivables, it followed the methodology that GAO recommended in the report and reported an estimate of valid receivables of $71 billion and collectible receivables of $29 billion in its September 30, 1993, financial statements.
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| Internal Revenue Service | The Commissioner of Internal Revenue should direct CFO to modify the IRS methodology for assessing the collectibility of its receivables by including an analysis of individual taxpayer accounts to assess their ability to pay. |
IRS has taken action to modify the calculation of its accounts receivable methodology. For the September 30, 1993, balance, IRS took a statistical sample of 3,220 receivables and individually determined the collectibility of each receivable. IRS then projected the results to the universe.
|
| Internal Revenue Service | The Commissioner of Internal Revenue should direct CFO to modify the IRS methodology for assessing the collectibility of its receivables by basing group analyses on categories of assessments with similar collection risk characteristics. |
IRS has implemented a statistical sampling method for assessing the collectibility of its receivables. However, GAO is also making additional recommendations to further address this problem.
|
| Internal Revenue Service | The Commissioner of Internal Revenue should direct CFO to modify the IRS methodology for assessing the collectibility of its receivables by considering current and forecast economic conditions, as well as historical collection data, in analyses of groups of assessments. |
IRS has implemented a statistical sampling method for assessing the collectibility of its receivables. However, GAO is also making additional recommendations to further address this problem.
|
| Internal Revenue Service | Once the appropriate data are accumulated, IRS may use modeling to analyze collectibility of accounts on a group basis, in addition to separately analyzing individual accounts. Such modeling should consider factors that are essential for estimating the level of losses, such as historical loss experience, recent economic events, and current and forecast economic conditions. In the meantime, statistical sampling should be used as the basis for both individual and group analyses. |
IRS has implemented a statistical sampling method for assessing the collectibility of its receivables. However, GAO is also making additional recommendations to further address this problem.
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Accounting proceduresAccounts receivableChief financial officersCivil auditsDebt collectionFederal agency accounting systemsFinancial recordsFinancial statement auditsReporting requirementsTax administration