Internal Revenue Service

This report presents the results of GAO's audit of the Internal Revenue Service's (IRS) financial statements for fiscal year 1998. GAO found that pervasive weaknesses in the design and operation of IRS' financial management systems, accounting procedures, documentation, recordkeeping, and internal controls prevented IRS from reliably reporting on the results of its administrative activities. IRS was able to reliably report on the results of its custodial activities for fiscal year 1998, including tax revenue received, tax refunds disbursed, and taxes receivable due from the public. However, this achievement required extensive, costly, and time-consuming ad hoc procedures to overcome pervasive and long-standing internal control and systems weaknesses. IRS' major accounting, reporting, and internal control deficiencies include, among other things, (1) poor preventive controls over tax refunds, which have resulted in millions of dollars in fraudulent refunds; (2) the inability to properly safeguard or reliably report its property and equipment; (3) vulnerabilities in computer security that may allow unauthorized persons access to taxpayer information; and (4) an inability to properly account for, report, and control its budgetary resources. Such weaknesses, as they relate to IRS' administrative activities, prevented GAO from rendering an unqualified opinion on five of IRS' six principal financial statements. IRS acknowledges these weaknesses and plans to address them. This testimony summarized GAO's March 1999 report, GAO/AIMD-99-75.

GAO noted that: (1) serious internal control and financial management issues continue to plague the IRS; (2) pervasive weaknesses in the design and operation of IRS' financial management systems, accounting procedures, documentation, recordkeeping, and internal controls, including computer security controls, prevented IRS from reliably reporting on the results of its administrative activities; (3) in contrast, IRS was able to report reliably on the results of its custodial activities for FY 1998, including tax revenue received, tax refunds disbursed, and taxes receivable due from the public; (4) this was the second year GAO has been able to render an unqualified opinion with respect to IRS' financial reporting of its custodial activities; (5) this achievement, however, required extensive, costly, and time-consuming ad hoc procedures to overcome pervasive internal control and systems weaknesses; and (6) IRS' major accounting, reporting and internal control deficiencies include: (a) an inadequate financial reporting process that resulted in IRS' inability to reliably prepare several of the required principal financial statements, and financial management systems that do not comply with the requirements of the Federal Financial Management Improvement Act of 1996; (b) the lack of a subsidiary ledger to properly manage taxes receivable and other unpaid assessments, resulting in instances of both taxpayer burden and lost revenue to the government; (c) deficiencies in preventive controls over tax refunds that have permitted the disbursement of millions of dollars of fraudulent refunds; (d) vulnerabilities in controls over tax receipts and taxpayer data that increase the government's and taxpayers' risk of loss or inappropriate disclosure of sensitive taxpayer data; (e) a failure to reconcile its fund balance to Treasury records during FY 1998, and an inability to provide assurance that its budgetary resources are being properly accounted for, reported, and controlled; (f) the inability to properly safeguard or reliably report its property and equipment; and (g) vulnerabilities in computer security that may allow unauthorized individuals to access, alter, or abuse proprietary IRS programs and data, and taxpayer information.