Internal Revenue Service

Remaining Challenges to Achieve Lasting Financial Management Improvements Gao ID: T-AIMD/GGD-98-139 April 15, 1998

This testimony discusses the results of GAO's audit of the Internal Revenue Service's (IRS) fiscal year 1997 custodial financial statements, which report the assets, liabilities, and results of activities related to IRS' responsibilities for implementing federal tax legislation, such as collecting federal tax revenues, refunding overpayments, and pursuing collections of amounts owed. For the first time, GAO was able to conclude that IRS' custodial financial statements were reliable. However, IRS' internal controls continue to be plagued by weaknesses that affect its ability to report, in a timely fashion, reliable financial information throughout the year; safeguard assets from loss; and ensure full compliance with laws and regulations. These weaknesses fall into the following areas: unpaid assessments, receipts and refunds, revenue accounting and reporting, compliance with the Federal Financial Management Improvement Act, and computer security. This testimony also discusses (1) the importance of preparing IRS' automated systems for Year 2000 compliance and (2) the potential implications of the IRS Commissioner's restructuring proposal on the agency's financial operations.

GAO noted that: (1) in issuing an unqualified opinion on the FY 1997 custodial statements within the statutory deadline of March 1, GAO reported that the over $1.6 trillion in tax revenue, $142 billion in tax refunds, and $28 billion in net taxes receivable reported by the IRS were fairly stated; (2) prior to FY 1997, GAO was unable to conclude that IRS' custodial financial statements were fairly stated, mainly because weaknesses in IRS' internal controls prevented it from producing reliable financial information; (3) therefore, GAO's ability to conclude that the FY 1997 custodial financial statements were reliable was a mark of progress; (4) however, this could only be accomplished after extensive use of ad hoc programming by IRS to extract data from its systems, followed by numerous adjustments totalling tens of billions of dollars to this data to produce the final financial statements; (5) during GAO's FY 1997 audit, it found that IRS' internal controls remain plaqued by weaknesses that affect its ability to timely report reliable financial information throughout the year, safeguard assets from loss, and assure full compliance with laws and regulations; (6) GAO reported these weaknesses related to IRS' custodial activities as a material weakness in its report on the FY 1997 consolidated financial statements of the United States government; (7) these weaknesses include: (a) unpaid assessments; (b) receipts and refunds; (c) revenue accounting and reporting; (d) compliance with the Federal Financial Management Improvement Act; and (e) computer security; and (8) in total, these findings frame the remaining challenges that IRS still must meet to assure that it is able to effectively manage unpaid assessments; assure its financial systems are able to provide accurate, relevant, and timely management information; assure that funds are properly safeguarded; and assure its computer systems are properly designed and protected.

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