Financial Audit

The Internal Revenue Service's (IRS) Custodial Financial Statements report the financial position and results of activities related to IRS' responsibilities for implementing federal tax legislation, including collecting federal tax revenues, refunding overpayments of taxes, and pursuing collection of amounts owed. GAO is unable to give an opinion on the Statement of Financial Position because IRS could not provide adequate documentation to support its balances of federal taxes receivable. Consequently, GAO was unable to determine whether the amount reported for net federal tax receivables, which comprise more than 95 percent of total custodial assets as of September 1996, was fairly stated. The Statement of Custodial Activity was reliable in all material respects, except that sufficient evidence supporting the classification of itemized tax collections and refunds was unavailable. Material weaknesses affected GAO's ability to render an unqualified opinion on IRS' fiscal year 1996 financial statements taken as a whole. Material weaknesses in internal control and recordkeeping systems also precluded the tests necessary to provide a basis to report on compliance with laws and regulations.

GAO noted that: (1) GAO was unable to give an opinion on the statement of financial position because IRS could not provide adequate documentation to support its balance of federal taxes receivable; (2) the statement of custodial activity was reliable in all material respects, except that sufficient evidence supporting the classification of itemized tax collections and refunds was not available; (3) while GAO found that total collections of federal revenue (net) and total transfers to Treasury, net of refund appropriations, as reported on the statement of custodial activity, are fairly presented in all material respects in relation to the financial statements taken as a whole, the classification of itemized collections and refunds of federal taxes presented on the statement may not be reliable; (4) IRS management asserted that, except for the material weaknesses identified in IRS' FY 1996 Federal Managers' Financial Integrity Act of 1982 report, internal controls were effective in: (a) safeguarding assets; (b) assuring material compliance with laws and regulations; and (c) assuring that there were no material misstatements in amounts reported in the financial statements; (5) consequently, the internal controls were not effective in satisfying the objectives discussed during FY 1996; and (6) material weaknesses in internal control and recordkeeping systems also precluded the tests necessary to provide a basis for any report on compliance with pertinent laws and regulations.