Internal Revenue Service

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. This testimony summarizes the February 2000 report, GAO/AIMD-00-76.

GAO noted that: (1) while IRS has made progress in addressing some of the issues from GAO's audit of its FY 1998 financial statements, the results of GAO's FY 1999 financial audit revealed that IRS continues to experience pervasive material weaknesses in the design and operation of its automated financial management and related operational systems, accounting procedures, documentation, recordkeeping, and internal controls, including computer security controls; (2) specifically, the major issues identified in GAO's FY 1999 audit includes the following: (a) deficiencies in controls to properly manage unpaid assessments, resulting in both taxpayer burden and potentially billions of dollars in lost revenue to the government; (b) deficiencies in controls over tax refunds, permitting the disbursement of potentially billions of dollars of improper refunds; (c) vulnerabilities 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; (d) vulnerabilities in computer security that may allow unauthorized individuals to access, alter, or abuse proprietary IRS programs and electronic data and taxpayer information; (e) 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; (f) inadequate systems and controls that resulted in the inability to properly account for IRS' property and equipment and related costs; (g) inadequate budgetary controls, resulting in IRS' inability to assure that its budgetary resources are being properly accounted for, reported, and controlled; and (h) an inadequate financial reporting process that continued to result in IRS' inability to reliably prepare several of the required financial statements and financial management systems that do not comply with the requirements of the Federal Financial Management and Improvement Act of 1996; (3) many of the problems facing IRS represent serious agencywide financial management and operational challenges that will require a substantial and continuous commitment of resources, time, and expertise to correct; (4) IRS has major efforts under way to modernize both its organizational structure and its information systems; and (5) these efforts appear to be heading IRS in the right direction, but, as IRS itself has stated, successful modernization of its information systems will take years to fully achieve.