Financial Audit

The Internal Revenue Service's (IRS) reported gross accounts receivable have increased from $15.8 billion in 1980 to $110.7 billion as of September 30, 1991. This large balance implies that the American taxpayers owe a tremendous amount in unpaid federal taxes, and some have cited this figure as a potential source of government revenue. GAO found that the IRS reported gross receivables balance for June 30, 1991, was overstated by as much as $39.4 billion and that about two-thirds of what was owed was unlikely to be collected. IRS overstated its gross receivables mainly because it included duplicate and insufficiently supported assessments that it had recorded as part of its efforts to identify and collect taxes due. In addition, IRS estimates regarding the collectibility of its receivables were unreliable. IRS figures have been used in congressional deliberations on the impact that increased collections could have on reducing the deficit, assessing receivables growth, evaluating IRS enforcement and collection performance, and making decisions on IRS staffing needs. Further, some taxpayers may perceive that IRS efforts to collect taxes are not equitable based on the disparity between IRS gross receivables and amounts expected to be collected. This, in turn, could affect voluntary compliance with the tax laws.

GAO found that: (1) only about three-fifths of the IRS accounts receivable balance was valid because of duplicate and inadequately supported assessments of enforcement actions and collection activities; (2) IRS has emphasized supporting enforcement actions and monitoring assessments for collection rather than financial management, which has resulted in inaccurate reports; (3) unreliable IRS accounts receivable may hamper IRS operations; (4) IRS automated systems are outdated, inefficient, unintegrated, and unreliable; (5) IRS has several accounting system improvement efforts under way to reduce erroneous assessments, but those efforts neglect financial reporting; (6) the IRS Chief Financial Officer (CFO) does not have control of revenue accounting or the authority to ensure that IRS systems provide needed data; (7) CFO can help ensure the availability of needed data by overseeing the design of financial management systems; (8) the IRS methodology for estimating collectibility is not reliable because it includes invalid receivables, relies on collection experience rather than collection risk, and does not consider taxpayers' ability to pay; (9) IRS needs to consider individual accounts as well as group accounts for analysis; and (10) the lack of reliable data hampers IRS ability to collect valid assessments and evaluate the effectiveness of its collection efforts.

Recommendations

Our recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.

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