Financial Audit

The Internal Revenue Service (IRS) has the daunting responsibility of collecting the nation's taxes, processing tax returns, and enforcing the tax laws. The size and complexity of the agency's operations--IRS has about 100,000 employees in locations across the country--present additional challenges for IRS management. Despite these challenges, IRS successfully collected about $1.9 trillion in taxes in fiscal year 1999, processed hundreds of millions of tax returns, and paid about $185 billion in refunds. IRS has responded to some of the management concerns that GAO has raised in the past. However, this audit of IRS' financial statements for fiscal year 1999 found that serious problems persist. These problems include (1) deficiencies in controls to properly manage unpaid assessments, resulting in both taxpayer burden and potentially billions of dollars in lost revenue for the government; (2) poor controls over tax refunds, potentially allowing the disbursement of billions of dollars in improper refunds; (3) vulnerabilities in controls over hardcopy tax receipts and taxpayer data that increase the risk of inappropriate disclosure or loss of taxpayer data; (4) vulnerabilities in computer security that may allow unauthorized people to access, alter, or abuse sensitive IRS programs and data; (5) the failure to reconcile IRS' fund balance with Treasury records throughout fiscal year 1999; (6) inadequate systems and controls that resulted in the inability to properly account for IRS' property and equipment and related costs; (7) inadequate budgetary controls; and (8) an inadequate financial reporting process. Many of these problems have plagued IRS since GAO first began auditing the agency's financial statements in the early 1990s. These weaknesses prevented GAO from rendering an unqualified opinion on five of IRS' six financial statements. GAO summarized this report in testimony before Congress; see: Internal Revenue Service: Results of Fiscal Year 1999 Financial Statement Audit, by Gregory D. Kutz, Associate Director for Governmentwide Accounting and Financial Management Issues, before the Subcommittee on Government Management, Information and Technology, House Committee on Government Reform. GAO/T-AIMD-00-104, Feb. 29 (21 pages).

GAO noted that: (1) during FY 1999, IRS had made a number of improvements to address some of the management issues GAO raised in previous reports; (2) GAO noted improvements in IRS': (a) overall financial reporting; (b) records of accounts payable; (c) amounts held in suspense; (d) documentation of unpaid tax assessments; (e) reconciliation of fund balance with Treasury; (f) computer security; and (g) handling of taxpayer receipts and data, including courier security; (3) IRS senior management has clearly demonstrated a commitment to address operational and financial management issues; (4) a high level of involvement by IRS senior management has contributed significantly to actions taken to resolve some of the issues GAO raised; and (5) continued involvement at this level is critical to IRS' success in addressing the following remaining key issues: (a) an inadequate financial reporting process, resulting in IRS' inability to reliably prepare several of the required financial statements; (b) deficiencies in controls to properly manage unpaid assessments, resulting in both taxpayer burden and potentially billions of dollars in lost revenue to the government; (c) deficiencies in controls over tax refunds, permitting the disbursement of potentially billions of dollars of improper refunds; (d) the failure to reconcile IRS' fund balance with Treasury records throughout FY 1999, resulting in IRS' inability to routinely ensure accountability and proper use of its funds; (e) inadequate systems and controls that resulted in the inability to properly account for IRS' property and equipment and related costs; (f) inadequate budgetary controls, resulting in IRS' inability to assure that its budgetary resources are being properly accounted for, reported, and controlled; (g) deficiencies in computer security controls that may allow unauthorized individuals to access, alter, or abuse proprietary IRS programs and electronic data and taxpayer information; (h) deficiencies in controls over hardcopy tax receipts and taxpayer data that increase the government's and taxpayers' risk of loss or inappropriate disclosure of taxpayer data; (i) deficiencies in revenue reporting and excise tax distributions, resulting in IRS' inability to separately report revenue collected for three of the federal government's four largest revenue sources and errors in quarterly distributions of excise tax revenue to trust funds; and (j) noncompliance with selected provisions of the Internal Revenue Code and the Federal Financial Management Improvement Act of 1996.