Management Report
Improvements Needed in IRS's Accounting Procedures and Internal Controls Gao ID: GAO-02-746R July 18, 2002During fiscal year 2001, the Internal Revenue Service (IRS) had a number of internal control issues that affected financial reporting, including safeguarding of assets. These concern policies and procedures over (1) receipt of taxpayer payments, (2) courier services that transport taxpayer data, (3) employee fingerprint records, (4) issuance of manual refunds, (5) release of tax liens, (6) recording of property and equipment transactions, (7) linking of property and accounting records, (8) software licenses, (9) reimbursable receivables, and (10) recording changes in administrative account balances.
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GAO-02-746R:
United States General Accounting Office:
Washington, DC 20548:
July 18, 2002:
The Honorable Charles O. Rossotti:
Commissioner of Internal Revenue:
Subject: Management Report: Improvements Needed in IRS's Accounting
Procedures and Internal Controls:
Dear Mr. Rossotti:
In February 2002, we issued our report on the results of our audit of
the Internal Revenue Service‘s (IRS‘s) financial statements as of, and
for the fiscal years ending, September 30, 2001, and 2000, [Footnote 1]
and on the effectiveness of its internal controls as of September 30,
2001. We also reported our conclusions on IRS‘s compliance with
significant provisions of selected laws and regulations and on whether
IRS‘s financial management systems substantially comply with
requirements of the Federal Financial Management Improvement Act of
1996. A separate report on the implementation status of recommendations
from our prior IRS financial audits and related financial management
reports will be issued shortly.
The purpose of this report is to discuss additional matters identified
during our fiscal year 2001 audit regarding accounting procedures and
internal controls that could be improved. These matters are not
considered material in relation to the financial statements; however,
they warrant management‘s consideration.
Results in Brief:
During fiscal year 2001, IRS had a number of internal control issues
that affected financial reporting, including safeguarding of assets.
These issues concern policies and procedures over (1) receipt of
taxpayer payments, (2) courier services that transport taxpayer data,
(3) employee fingerprint records, (4) issuance of manual refunds, (5)
release of tax liens, (6) recording of property and equipment (P&E)
transactions, (7) linking of property and accounting records, (8)
software licenses, (9) reimbursable receivables, [Footnote 2] and (10)
recording changes in administrative account balances.
Specifically, we found the following:
* IRS did not have adequate controls over taxpayer payments received at
certain field locations. We found that (1) although receipts were
usually issued, notices reminding taxpayers to obtain receipts for
payments were not present, (2) at two field office locations, payments
placed in drop boxes were processed by only one employee, and (3)
payment logs were not reconciled to taxpayer documents. As a result,
IRS‘s risk of theft, loss, or misuse of taxpayer deposits was
increased.
* IRS service center campuses did not ensure that couriers had undergone
background checks. As a result, IRS‘s risk of theft, loss, or misuse of
deposits and taxpayer information was increased.
* IRS‘s database to track fingerprint results was subject to technical
constraints and human error. These issues resulted in numerous
instances of erroneous or missing data. Incomplete and inaccurate
fingerprint data may hamper IRS‘s investigations of security
violations.
* IRS staff did not always perform or document required monitoring of
manually processed tax refunds. As a result, the risk that other staff
or IRS‘s automated tax system could issue duplicate refunds was
increased.
* IRS did not record the dates on which certificate of lien releases
were mailed to courts and we noted long delays between the date of the
IRS certificate of lien release and the date the local jurisdiction
recorded its receipt. Delays in releasing tax liens could cause undue
hardship and burden to taxpayers who are attempting to sell property or
apply for commercial credit.
* IRS did not follow procedures for promptly recording assets on its
property management system, resulting in delays in the proper
accounting for hundreds of P&E items, such as microcomputers.
* IRS‘s asset acquisition costs on the accounting records could not
always be linked to assets recorded on the inventory records.
Consequently, the existence of certain property acquired and recorded
on accounting records during fiscal year 2001 was not verifiable.
* IRS‘s property management system did not maintain an inventory of
software or software licenses. As a result, IRS could not determine its
compliance with software licenses or effectively account for and manage
acquired software.
* IRS did not adequately monitor and review reimbursable receivables to
determine their validity or collectibility. As a result, certain amounts
recorded as reimbursable receivables reported on IRS‘s financial
statements were not valid or were uncollectible.
* IRS did not have procedures to estimate and accrue material changes in
administrative account balances throughout the fiscal year. The lack of
these procedures going forward may preclude IRS from having assurance
that interim financial statements it is required to prepare for fiscal
year 2002 per the Office of Management and Budget (OMB) Bulletin 01-09,
Form and Content of Agency Financial Statements, are reliable.
At the end of our discussion on each of these issues, we offer
recommendations for strengthening IRS‘s internal controls.
In its comments, IRS agreed with our recommendations and described
actions it was taking or had planned to address several of the control
weaknesses described in this report. At the end of our discussion of
each of the issues in this report, we have summarized IRS‘s related
comments and provided our evaluation. We also considered IRS‘s feedback
on our findings and have made revisions as appropriate.
Scope and Methodology:
As part of our audit of IRS‘s fiscal years 2001 and 2000 financial
statements, we evaluated IRS‘s internal controls and its compliance
with selected provisions of laws and regulations. We designed our audit
procedures to test relevant controls and included tests for proper
authorization, execution, accounting, and reporting of transactions.
We conducted our audit in accordance with U.S. generally accepted
government auditing standards. Further details on our scope and
methodology are included in our February 2002 report on the results of
our fiscal years 2001 and 2000 financial statement audit. [Footnote 3]
We requested comments on a draft of this report from the Commissioner
of IRS or his designee. We received written comments from the Deputy
Commissioner and have reprinted the comments in enclosure I to this
report.
IRS Needs to Strengthen Controls Over Taxpayer Receipts:
During our fiscal year 2001 financial audit, we identified several
issues related to IRS‘s controls over taxpayer receipts that increased
the risk that such receipts could be lost or stolen and that the theft
would not be timely detected. GAO‘s Standards for Internal Controls in
the Federal Government requires agencies to establish controls to
safeguard valuable assets and reduce the risk of error or fraud. The
standards state that such controls should include 1) periodic
comparisons between resources and records to ensure proper
accountability and 2) segregation of duties so that no one individual
controls all aspects of a transaction.
In prior audits, we had noted weaknesses in IRS‘s physical controls
over service center campus and field office taxpayer receipts.
[Footnote 4] We recommended that IRS (1) establish procedures to
provide receipts to walk-in taxpayers [Footnote 5] at IRS service
center campuses regardless of the method of payment, and (2) post signs
at the campuses to remind taxpayers to ask for receipts. We also
recommended that IRS record remittances made by walk-in taxpayers in
control logs prior to depositing them in a locked container, and that
IRS reconcile the control log information to the tax receipts prior to
processing. As a result of our recommendations, IRS issued guidance in
1999 and updated its procedures in 2000 on controls over receipts.
Specifically, these procedures required IRS to (1) post signs in all
service center campus lobbies to remind taxpayers to request a receipt,
(2) record payments made by walk-in taxpayers on control logs, and (3)
establish segregation of duties for recording and reconciling taxpayer
receipts.
During our fiscal year 2001 audit, we found that service center
campuses no longer accepted walk-in payments, but rather directed
taxpayers to field offices. At the field offices we visited, we found
that although IRS employees usually issued a receipt for walk-in
payments, IRS had no policy requiring that field offices issue a
receipt for all payments. Additionally, IRS had no requirement that
signs be posted in field office lobbies to remind taxpayers to request
receipts. One field office we visited had not posted such signs. The
issuance of receipts for all payments, followed by timely and thorough
management reviews of receipts issued, provides better accountability
for walk-in payments received by IRS.
Additionally, we found control issues related to drop boxes maintained
at field offices for walk-in taxpayers to deposit payments. At each of
the two offices we visited, we found that only one employee emptied the
drop box and recorded the payments on a log. At one of the offices, the
same employee later reconciled the payments to the log. Requiring two
employees to retrieve and record payments from drop boxes establishes
better control and accountability for these receipts. However, IRS
currently does not have a policy requiring dual control over drop box
receipts. Additionally, IRS did not provide adequate oversight to
ensure that its employees adhered to its policy regarding segregation
of duties over the reconciliation of receipts. This increases the risk
of theft of taxpayer payments.
IRS did not have policies/procedures to reconcile receipts found during
final candling to the final candling log. [Footnote 6] As a result, we
found that two IRS service center campuses and one of two lockbox banks
[Footnote 7] we visited did not reconcile receipts found during final
candling to the candling logs. At the lockbox bank, we noted that two
separate logs were used to record checks found during final candling.
Employees performing final candling recorded only the number of checks
found on the initial log while a supervisor prepared a second more
detailed log several hours later that identified the taxpayer and the
amount of the check. However, the supervisor did not reconcile the
number of checks indicated on the initial log with the checks on hand.
Consequently, bank managers were unable to explain differences we noted
between the number of checks on the initial log and the detailed log.
The failure to maintain adequate control logs of all checks found
during final candling increases the risk that not all checks will be
accounted for and eventually credited to taxpayers‘ accounts.
Recommendations:
We recommend that you direct IRS management to develop policies and
procedures to require that:
* field office employees provide taxpayers receipts for all walk-in
payments;
* field offices post signs in the most visible locations to remind
taxpayers to obtain receipts for payments;
* two employees be present when payments are collected and logged from
drop boxes;
* IRS and lockbox employees performing final candling record receipts
in a control log at the time of discovery, recording at a minimum the
total number of payments found, the amount of each payment, and the
taxpayer who submitted the payment; and;
* IRS and lockbox managers or designated officials reconcile logs of
payments found during final candling to the related receipts and
documents.
We also recommend that you direct IRS headquarters management to ensure
that field office management comply with existing receipt control
policies that require a segregation of duties between employees who
prepare control logs for walk-in payments and employees who reconcile
the control logs to the actual payments.
IRS‘s Comments and Our Evaluation:
In its comments, IRS noted that it had taken several actions to address
this finding. Specifically, IRS stated that it (1) revised signs and
posted them in all Taxpayer Assistance Centers or field offices
notifying taxpayers that they may request a receipt, (2) distributed to
Taxpayer Assistance Center sites or field offices a procedural memo
outlining separation of duties to emphasize the need to have more than
one employee process drop box payments, and (3) established a task
force to develop procedures to reconcile payment logs. We will evaluate
the effectiveness of IRS‘s efforts during our fiscal year 2002
financial audit.
IRS Needs Better Enforcement Of Courier Service Policy:
During our fiscal year 2001 audit, we found that IRS did not have
effective controls in place to ensure that new courier service
requirements were enforced. Since November 1998, we reported that IRS
did not have effective controls over courier services responsible for
transporting taxpayer receipts. [Footnote 8] This increased IRS‘s risk
of theft, loss, or misuse of deposits and taxpayer information. We
recommended that IRS develop policies to ensure that contracts related
to courier services do not unduly expose the government or taxpayers to
losses in the event of lost, stolen, or damaged deposits in transit. In
response, IRS issued courier service standards that require that
courier service employees pass a limited background investigation.
During our fiscal year 2001 audit, we identified weaknesses in IRS‘s
enforcement of its courier service standards. Specifically, at the two
IRS service center campuses we visited, we found that background checks
for couriers were not performed or were performed too late. At one
campus, managers did not believe a background check was required
because their couriers did not physically enter the campus facility and
the courier policy only required couriers given access to campus
premises to pass a background check. The courier policy limits
background check requirements to couriers given access to campus
premises. However, to better protect the government and taxpayers
against theft and losses, background checks should be performed on IRS
couriers entrusted with deposits because they are given access to the
deposits, which contain taxpayer data. Managers at another campus
understood the intent of the courier policy and obtained background
checks for its couriers even though they did not enter campus premises.
However, the background checks for these couriers were not performed
prior to entrusting them with deposits and taxpayer data because campus
managers did not know how to initiate the background check process for
couriers and did not know who was responsible for ensuring that this
process was performed. As a result, fingerprints and background
investigations on the couriers were not initiated until the latter part
of fiscal year 2001. This increased IRS‘s risk of theft, loss, or
misuse of deposits and taxpayer information.
Recommendation:
To ensure that service center campus management and the courier service
meet the intent of minimum courier policy requirements, we recommend
that you direct IRS headquarters management to clarify that the
requirement for background investigations is meant to apply to
personnel being entrusted with taxpayer receipts and information,
rather than just personnel being granted access to an IRS facility.
IRS‘s Comments and Our Evaluation:
IRS agreed that courier service employees should undergo background
checks. IRS noted it is working with FMS to modify courier service
contracts and is amending the IRM to require the courier service to
satisfy requirements for a basic investigation, which includes a
Federal Bureau of Investigation (FBI) fingerprint and name check. We
will evaluate the effectiveness of IRS‘s efforts during our fiscal year
2002 financial audit.
IRS Needs to Work With The National Finance Center To Correct
Fingerprint System:
During our fiscal year 2001 financial audit, we identified problems
with the integrity of certain information in a key database system IRS
uses to track compliance with its employee fingerprinting requirement.
Specifically, we found numerous instances of missing or erroneous data
in the National Finance Center‘s (NFC) Security Entry and Tracking
System (SETS) database. According to IRS staff, these problems are due
to both technical limitations in SETS and human error. Tracking
fingerprint results provides an important internal control for IRS to
prevent the hiring of applicants with inappropriate backgrounds.
In response to issues we raised in previous audits concerning physical
security of taxpayer receipts and data, IRS issued a directive in April
2000 that prohibited the hiring and placement of an applicant at any
IRS location until the applicant‘s fingerprint check had been received
and case disposition evaluated. An IRS memorandum issued April 23,
2001, provided guidance on monitoring IRS‘s background investigation
program, including fingerprint results. The memorandum states, ’It is
critical to the integrity of the system that the information entered in
SETS is timely and accurately entered.“ Based on the guidance, IRS
officials are required to review a SETS report that tracks records that
have missing fingerprint results or that indicate employees began work
before their fingerprint results were received. The officials are
required to follow up on these records, and update the SETS system
accordingly.
Our analysis of over 20,500 employee records in the SETS system
identified 411 records with missing or erroneous data. Specifically,
there were 231 employee records with blank fields for the date
fingerprint results were received and 180 employee records where the
dates the fingerprint results were received were earlier than the dates
the fingerprint checks were completed per information from the Office
of Personnel Management (OPM). SETS data for 42 of the 180 employee
records showed that the employees entered on duty after fingerprint
results were received, while OPM data indicated that fingerprint
results were not provided by OPM until after the employees began
working at IRS facilities.
According to IRS officials, many of these discrepancies are due to
technical constraints within SETS. For example:
* SETS did not always retain data fields when a person‘s status was
changed from applicant to employee.
* The SETS database allows only one record or line entry per employee or
social security number. Therefore, when subsequent
fingerprint/background results are received and entered, SETS
eliminates the initial fingerprint record and replaces it with the new
data.
* The ’enter-on-duty“ dates for seasonal employees are ’locked“ in SETS
for a period of time. When subsequent fingerprint checks are processed,
the SETS system will show the most recent date that these subsequent
fingerprint checks are initiated and completed. However, the system
will not allow a change to the enter-on-duty date until the seasonal
employee actually returns to IRS employment.
Additionally, IRS officials indicated that in some instances human
error contributed to missing or erroneous information in SETS. Because
of the constraints of the SETS system, staff were using local tools for
spreadsheet analysis to ensure that missing or misleading information
was researched and pertinent data annotated accordingly, so that the
local hiring and personnel officials could address questions regarding
missing or erroneous information.
Because of the data integrity issues with respect to certain
information in the SETS database, IRS‘s national office cannot
effectively monitor servicewide compliance with its employee
fingerprinting requirement. This increases the risk that employees
without fingerprint results may have unsuitable backgrounds to handle
cash, checks, and sensitive taxpayer information, thus increasing the
risk of potential theft and for misuse of proprietary taxpayer
information.
Recommendation:
We recommend that you direct IRS management to work with the NFC to
resolve the technical limitations that exist within the SETS database
and continue to periodically review SETS data to detect and correct
errors.
IRS‘s Comments and Our Evaluation:
In commenting on this section, IRS stated that it will work through the
Department of the Treasury in establishing a dialogue with NFC to
address SETS issues. IRS also stated that it had recently trained its
personnel on analyzing SETS data to ensure its accuracy and compliance
with IRS‘s fingerprint policies. We will evaluate the effectiveness of
IRS‘s efforts during our fiscal year 2002 financial audit.
IRS Needs to Ensure Compliance With Manual Refund Procedures:
During our fiscal year 2001 audit, we found that IRS staff did not
always comply with the agency‘s procedures designed to reduce the risk
of issuance of duplicate refunds. In our prior audits of IRS‘s
financial statements, we identified and reported weaknesses in IRS‘s
controls over manual refunds that resulted in instances in which IRS
issued duplicate refunds to taxpayers. [Footnote 9] This situation
occurred because IRS‘s (1) automated and manual refund processes are
not adequately coordinated to prevent duplicate refunds, [Footnote 10]
(2) manual refunds bypass most of IRS‘s automated validity checks, and
(3) manual refunds may not be recorded in the taxpayer‘s account until 6
weeks after the refund has been issued.
In response to our findings, IRS implemented a series of written
procedures to reduce the risk of issuing duplicate refunds. These
procedures require employees initiating a manual refund to (1) monitor
the taxpayer‘s master file [Footnote 11] account until the refund is
recorded in the account, and (2) document their monitoring actions on
case history sheets. The procedures also require that supervisors
review the initiator‘s monitoring actions and document this review. By
monitoring the taxpayer‘s master file account, the employee can detect
the recording of subsequent computer-generated or other manual refunds
and take action to stop duplicate refunds from being issued.
Documenting the monitoring action allows supervisors to verify and
ensure that the monitoring is being performed.
In our fiscal year 2001 financial audit, we found that IRS personnel
were not always following IRS‘s manual refund procedures. Specifically,
we found that employees initiating manual refunds did not always
monitor accounts or document their monitoring actions, and that
supervisors did not always review the initiator‘s monitoring actions.
At the two service center campuses we visited, employees and
supervisors stated they were unaware of the agency‘s manual refund
requirements. At one of these campuses, local procedures required
clerks, rather than the staff initiating the manual refund, to monitor
accounts. However, the clerks did not document their monitoring
actions, and supervisors did not review these actions. The failure to
follow IRS‘s refund monitoring procedures increases the risk that a
duplicate refund will be issued.
Recommendation:
We recommend that you direct IRS management to issue a formal reminder
of existing IRS manual refund procedures to supervisors and staff.
IRS‘s Comments and Our Evaluation:
In its comments, IRS noted that it sent a communication to all service
center campuses and field offices requiring that the appropriate IRS
division monitor all manual refunds to ensure that no duplicate refunds
are issued and to ensure that manual refunds are recorded in the
taxpayer‘s account. IRS stated that this communication also required
management to document their review. We will evaluate the effectiveness
of IRS‘s efforts during our fiscal year 2002 financial audit.
IRS Needs Procedures to Track Status of Lien Releases:
In previous audits and again during our fiscal year 2001 audit, we
found that IRS did not comply with certain provisions of the Internal
Revenue Code (IRC) regarding the timely release of federal tax liens.
However, because IRS lacks procedures to adequately track the lien
release process, neither we nor IRS were able to determine the full
extent of the problem. The failure to promptly release tax liens could
cause undue hardship and burden to taxpayers who are attempting to sell
property or apply for commercial credit.
The IRC grants IRS the power to file a lien against the property of any
taxpayer who neglects or refuses to pay all assessed federal taxes. The
lien becomes effective when it is filed with a designated office, such
as a courthouse in the county where the taxpayer‘s property is located.
The lien serves to protect the interest of the federal government and
serves as a public notice to current and potential creditors of the
government‘s interest in the taxpayer‘s property. For example, federal
tax liens are disclosed in credit reports of individuals. Under Section
6325 of the IRC, IRS is required to release a federal tax lien within
30 days after the date the tax liability is satisfied or has become
legally unenforceable or the Secretary of the Treasury has accepted a
bond for the assessed tax.
In our fiscal year 2001 financial audit, we tested a statistical sample
of 59 tax cases with liens in which the taxpayers‘ total outstanding
tax liabilities were either paid off or abated during fiscal year 2001.
We found 5 instances in which IRS‘s Automated Lien System (ALS)
[Footnote 12] clearly indicated that IRS had not released the
applicable federal tax lien within the statutory requirement. Based on
these 5 cases, we estimated that 8 percent of all liens were not
released timely. [Footnote 13] However, we also identified 9 additional
cases where the liens may not have been effectively released within the
required period. In these cases, the time between the date on the IRS
lien release certificate and the date when the jurisdiction handling
the lien stamped the form as received exceeded 30 days, in some
instances substantially. For 5 of these 9 cases, the period between the
date on IRS‘s lien release certificate document and the date of the
receipt by the local jurisdiction exceeded 90 days. In 1 of these, the
lien release was not recorded by the local jurisdiction until 9 months
after the date on the lien release certificate.
Currently, the only information IRS has to determine whether a lien was
released timely is the date on the certificate of release of lien.
However, this is the date on which ALS generates the document and does
not necessarily represent the date when the authorizing IRS official
signed it or when IRS mailed it to the local jurisdiction. IRS
procedures currently do not require employees to track the status of
lien releases up to the point of delivery to the local jurisdiction. As
a result, both we and IRS were unable to determine whether delays took
place at IRS, the local jurisdiction, or a combination of the two, and
thus devise a strategy to address these delays. However, since the lien
is not legally released until recorded by the local jurisdiction, these
delays could cause undue hardship and burden on taxpayers who want to
sell property or apply for commercial credit.
Recommendation:
We recommend that you direct IRS management to establish procedures to
track the release of liens up to the point of delivery to the local
jurisdiction to ensure liens are released timely to avoid unduly
burdening taxpayers once they have satisfied their tax liability.
IRS‘s Comments and Our Evaluation:
In commenting on this section, IRS agreed that the failure to timely
release liens could cause undue hardship and additional burden on
taxpayers, and that existing procedures should be strengthened to
include monitoring the mailing of certificates of release. While IRS
noted that the timely release of liens also depends upon the United
States Postal Service delivering the release to the recording
jurisdictions within established timeframes and the jurisdiction
recording the certificates of release promptly after receipt, IRS
accepted responsibility for generating certificates of release and
transmitting them to the appropriate recording official. To ensure it
accomplishes these actions within established timeframes, IRS stated
that it is formulating procedures requiring a date stamp (mailing date)
on the billing voucher, which lists each lien release IRS sends to the
recording official. IRS stated it would also reemphasize to staff the
importance of timely accomplishing all other lien processing steps. We
will evaluate the effectiveness of IRS‘s efforts during our fiscal year
2002 financial audit.
IRS Needs to Improve Procedures for Recording P&E Acquisitions On
Inventory Records:
During our fiscal year 2001 audit, we continued to find issues with
IRS‘s procedures for recording assets on its inventory records that
inhibit IRS‘s ability to properly account for and manage its assets.
Specifically, we found that the P&E inventory did not always contain
valid records. In addition, we found that assets were not always
recorded promptly upon receipt. Accurate records are essential for
maintaining control over P&E to ensure that assets are properly
accounted for and safeguarded.
While we noted progress in IRS‘s efforts to promptly and accurately
record P&E on its inventory records in fiscal year 2001, we nonetheless
continued to find errors in IRS‘s property records, the most
significant of which were discussed in our recently issued report on
the results of our fiscal year 2001 audit. [Footnote 14] In addition to
the issues discussed in that report, we also found that 12 of 210 (6
percent) randomly selected assets from the floor at 21 IRS facilities
were not recorded on IRS‘s inventory records. [Footnote 15] Of the 21
buildings sampled, 7 (33 percent) had at least 1 asset in our sample of
10 items that was not recorded on the inventory records. Items not
recorded included a vehicle, a laptop computer, a microcomputer, and
printers. While we were unable to determine the exact reason these
specific assets were not recorded, IRS personnel at 4 other sites we
visited stated that procedures for recording P&E acquisitions did not
function adequately to ensure that assets were promptly recorded on
inventory records.
IRS‘s procedures for recording P&E acquisitions provide that the IRS
National Office create ’due-in“ or skeletal property records in its
property management system based on information extracted from IRS‘s
procurement systems. The objective is to build an inventory template
record with key information that Single Point Inventory Function (SPIF)
personnel in the field offices can update upon receipt of the assets.
Based on our work, we found that improvements are needed to fully
achieve this objective. SPIF personnel at four sites where we conducted
testing noted that the National Office did not always create skeletal
inventory records prior to the receipt of assets. If a skeletal record
was not available upon the receipt of an asset, recording the asset on
the inventory records was delayed because procedures do not allow SPIF
units to create an inventory record. Before an asset could be added to
the inventory records, it was necessary for the SPIF unit to research
IRS‘s procurement system to identify requisition information and
provide the information to the National Office with a request to create
a skeletal asset record. As a result, delays occurred in recording some
assets, and some assets were not recorded until they were discovered
by IRS personnel during an annual inventory.
For example, at one site, 178 computers received on September 10, 2001,
were not recorded on the inventory records until October 1, 2001,
because a skeletal record was not available when the assets were
delivered. SPIF units at the sites we visited discovered hundreds of
unrecorded items, such as microcomputers and monitors, during the
fiscal year 2001 inventory. Not only were skeletal records not available
when assets were delivered, but skeletal records were also initiated
but not completed, resulting in invalid records. During our fiscal year
2001 audit, we found 461 invalid property records on IRS‘s inventory
system because a skeletal record had been created but not completed.
This reduces the reliability of the information maintained in the
inventory system and impedes IRS management‘s ability to control and
account for federal property.
Recommendations:
We recommend that you direct IRS management to:
* ensure that complete skeletal records are created and available for
the SPIF units to update upon receipt of P&E, and;
* develop procedures and edit checks to reduce the likelihood of invalid
property records.
IRS‘s Comments and Our Evaluation:
In its comments, IRS stated that it agreed with our recommendations and
is taking actions to address this issue. IRS stated that it is
developing a system and procedures to create skeletal records and to
ensure timely updates to inventory records. We will evaluate the
effectiveness of IRS‘s efforts during our fiscal year 2002 financial
audit.
IRS Needs to Improve Its Process for Linking P&E Acquisitions to
Property Records:
During our fiscal year 2001 audit, we found that asset acquisition
transactions recorded on accounting records could not always be linked
to assets recorded on the property records. The ability to link costs
recorded on the accounting records to property records is essential to
verify the existence of assets purchased.
IRS‘s property management system does not capture the acquisition cost
of P&E. As a result, the property management system does not provide
either the detailed subsidiary records to support the general ledger
control balances or the detailed information needed for financial
reporting. To compensate for this deficiency, IRS extracts the
acquisition costs of P&E from expense records at fiscal year end and
accumulates the costs into pools of similar assets. Costs accumulated
into asset pools are to be linked to assets recorded on the property
records through IRS‘s procurement systems using procurement award
numbers and requisition numbers.
However, we found that costs recorded in the accounting records could
not always be linked to items recorded on the property records because
the procurement award numbers and requisition numbers recorded on the
property records were invalid or incomplete.
Although IRS was eventually able to link a majority of the P&E
acquisitions we selected for testing during our fiscal year 2001 audit,
this process took 6 weeks to complete. Additionally, IRS was unable to
link a number of the P&E acquisition items to the property records.
Specifically, IRS was unable to link 4 of 17 P&E acquisition
transactions we tested to the property records and could only partially
link the assets purchased in 3 other transactions. For example, IRS was
able to link 90 of 180 computers purchased in 1 transaction to the
property records. [Footnote 16] Consequently, the existence of all
property acquired and recorded on the accounting records during fiscal
year 2001 could not be verified.
Recommendation:
We recommend that you direct IRS management to develop procedures to
ensure that procurement award and requisition numbers recorded on
property records are complete, accurate, and linked to the accounting
records.
IRS‘s Comments and Our Evaluation:
In commenting on this section, IRS stated that it agreed with our
recommendation. IRS noted that it is developing procedures and systems
to capture more detailed information on property records and that this
process will require vendors to include requisition and procurement
numbers of equipment purchases at the time of shipment. IRS also noted
that the full integration of inventory procurement and accounting would
occur with the implementation of its Integrated Financial System. We
will evaluate the effectiveness of IRS‘s efforts during our fiscal year
2002 financial audit.
IRS Needs Records to Adequately Account for and Manage Software:
During our fiscal year 2001 audit, we found that IRS‘s property
management system did not capture information, such as the licenser,
contract period, and number of authorized users essential to ensure
that software and software licenses are controlled and utilized in
accordance with software license contracts. The Joint Financial
Management Improvement Program (JFMIP) Property Management Systems
Requirements state that property management systems should capture
information essential to ensuring that software and software licenses
are controlled and in compliance with contractual licenses and
agreements with software developers, vendors, or software licensers.
IRS‘s property management system did not provide an inventory of the
number of software licenses or the number of software installations. To
properly account for compliance with software license agreements, IRS
must determine if the number of installations exceeds the number of
licenses. IRS is in the process of identifying the number of software
licenses to record in its property management system. However, as of
the end of our audit, IRS had not yet recorded software licenses in its
property management system nor had it developed an approach to assess
if the number of installations are in compliance with the terms of
these software licenses.
Recommendations:
We recommend that you direct IRS management to:
* record software licenses in IRS‘s property management system, and;
* develop an approach to assess IRS‘s compliance with the terms of these
software licenses.
IRS‘s Comments and Our Evaluation:
In its comments, IRS stated that it agreed with our recommendations.
IRS stated that it is executing an action plan that will allow it to
record existing software data into its property management database and
establish a process that will inform the Asset Management office of new
licenses purchased so they can be recorded within established
timeframes. IRS stated that it is also developing an action plan that
will set procedures and policies for the review and compliance to the
terms of the licenses. We will evaluate the effectiveness of IRS‘s
efforts during our fiscal year 2002 financial audit.
IRS Needs to Review and Properly Adjust Receivables in Its Accounting
Records:
During our fiscal year 2001 audit, we continued to find control
weaknesses over IRS‘s accounting for reimbursable activities, which
resulted in IRS overstating its receivables for reimbursable
activities. During fiscal year 2000, we reported that the records IRS
maintained regarding reimbursable receivables were not reliable.
[Footnote 17] We recommended IRS routinely review and age open
reimbursable receivables to identify accounts that are no longer valid
or collectible. During fiscal year 2001, we did find that IRS began
aging accounts for the purpose of writing off older transactions and
that IRS revised loss percentages that it applied to receivable
accounts to determine the net realizable value of these receivables.
However, we found that IRS was still reporting reimbursable receivable
amounts that were not valid receivables or that should have been
written off as uncollectible.
GAO‘s Standards for Internal Control in the Federal Government states
that internal controls should generally be designed to assure that
ongoing monitoring occurs in the course of normal operations. This
includes regular management and supervisory activities, comparisons,
reconciliations, and other actions people take in performing their
duties. Monitoring of receivables would include assessing receivables to
determine both the accuracy of the recorded balance and the potential
to collect the balance.
We tested a nonrepresentative selection of the five largest
reimbursable receivables at the end of fiscal year 2001 and found
exceptions involving two of the accounts. Specifically, we found that
one of these accounts was not a valid receivable at fiscal year end,
and the other receivable was not collectible and should therefore have
been written off.
In the first instance, IRS improperly reported as receivables $711,000
of fees charged to taxpayers for photocopying tax documents. IRS staff
at service center campuses had collected these fees when services were
provided and had recorded the collections in the IRS custodial
accounting general ledger. IRS‘s general ledger system comprises both
an independent administrative and a custodial general ledger that are
not integrated with each other nor with their supporting records for
material balances. Service center campus staff reported the revenue of
the photocopy fees from the custodial general ledger to the
administrative accounting staff prior to the closing of the accounting
records at fiscal year end. However, the actual transfer of funds from
the custodial system to the administrative accounting general ledger did
not take place until after the end of the fiscal year. When IRS‘s
administrative accounting staff recorded the fees in the administrative
general ledger to recognize the revenue in the proper period, they
recorded them as uncollected fees as of fiscal year end. As a result,
the amount was erroneously included in the financial statements as a
receivable.
In the second instance, IRS reported in its fiscal year 2001 financial
statements a receivable totaling $405,000 that represented an
outstanding charge that had been disputed by another government agency.
IRS had billed and collected $2.1 million from the agency for services
provided by IRS staff. However, the agency disputed $405,000 of the
billed amount and initiated actions to reclaim the disputed amount.
Based on actions by the agency, Treasury applied the $405,000 of
charges against the IRS Treasury account and IRS agreed the amount was
not collectible. Nonetheless, it was erroneously reported as a fully
collectible receivable in IRS‘s financial statements. IRS noted that
the methodology it uses to recognize uncollectible amounts resulted in
the actual overstatement of receivables at fiscal year end being
$243,000.
Recommendation:
In addition to fully implementing our previous recommendations
regarding more effective review of reimbursable receivables, [Footnote
18] we recommend that you direct IRS management to ensure that, in the
absence of an integrated general ledger system for IRS‘s custodial and
administrative activities, IRS strengthen monitoring and analysis of
receivables to ensure that receivables are not being erroneously
recorded as a result of the lack of integration between these two
activities.
IRS‘s Comments and Our Evaluation:
In its comments, IRS stated that it agreed with our recommendation and
that it is taking steps to better manage reimbursable activity. IRS
noted for example, that it is now reconciling all reimbursable
receivable accounts with the appropriate general ledger accounts
monthly and is monitoring activities between custodial and
administrative accounts as part of this reconciliation process.
Additionally, IRS noted that it has implemented a process to routinely
review open receivables and take action to write off amounts as
appropriate. We will evaluate the effectiveness of IRS‘s efforts during
our fiscal year 2002 financial audit.
IRS Needs to Develop Procedures to Estimate and Accrue Operating
Revenue and Expenses:
During our fiscal year 2001 financial audit, we noted that IRS
continued to record material administrative transactions only at the
end of the fiscal year. IRS‘s imputed costs [Footnote 19] and other
benefit-related expenses are determined by other federal agencies, and
IRS is informed of the annual amount only at the end of the fiscal
year. In addition, its administrative operations receive exchange
revenues from installment agreements and other types of user fees and
these amounts are also recorded in the administrative accounts as
exchange revenue only at the end of the fiscal year. IRS does not have
a methodology for identifying operating activities and estimating
reasonable monthly accruals for recognizing costs and exchange revenues
for its administrative operations at interim periods. As a result,
IRS‘s financial records for these activities were misstated at interim
periods and the significance of these misstatements increases over the
course of the fiscal year until IRS records these transactions at the
end of the fiscal year.
GAO‘s Standards for Internal Control in the Federal Government requires
agencies to implement internal control procedures to ensure ongoing
reliability of its financial reporting. The standards also require that
transactions be promptly recorded to maintain their relevance and value
to management in controlling operations and making decisions.
Additionally, for fiscal year 2002, OMB Bulletin 01-09, Form and
Content of Agency Financial Statements, requires agencies to report
interim financial statements for the 6-month period ending March 31,
2002.
Even though IRS could readily estimate the annual amount of imputed
costs and prepare monthly accruals, it did not have procedures for
doing this during fiscal year 2001. Specifically, we found that imputed
costs on IRS‘s general ledger were understated by $406 million until
IRS made an adjusting entry after September 30, 2001. In addition,
employee benefit payment expenses were understated by $73 million until
IRS made a year-end adjusting entry. Exchange revenues for its
administrative operations were also understated at interim periods
because these revenues were not being estimated and accrued regularly
in the administrative operations financial records when the amounts to
accrue were readily available. Exchange revenues totaling over $108
million were not recognized in the administrative accounting records
until the end of the fiscal year. These revenues related primarily to
user fees for the processing of installment agreements and reviews of
exempt organizations/employer benefit plans.
Had IRS prepared interim financial statements during fiscal year 2001,
the effect of these omissions described above would have been interim
information that contained material misstatements for net cost and
exchange revenue. Until IRS establishes procedures for estimating and
accruing imputed administrative costs and exchange revenues, it will
not be able to produce reliable interim financial information. We have
made recommendations to address this weakness in our previous report
[Footnote 20] and thus we are not making any new recommendations.
However, we wanted to bring to your attention the significance of this
matter in light of the fiscal year 2002 requirement under OMB Bulletin
01-09.
IRS‘s Comments and Our Evaluation:
In its comments, IRS agreed that it needs to estimate and accrue
operating expenses in a timely manner. IRS stated that it began
recording quarterly expense accruals in fiscal year 2002. Additionally,
IRS stated that in fiscal year 2002, it began recording actual
quarterly user fee revenues in its administrative accounts. We will
evaluate the effectiveness of IRS‘s efforts during our fiscal year 2002
financial audit.
This report contains recommendations to you. The head of a federal
agency is required by 31 U.S.C. 720 to submit a written statement on
actions taken on these recommendations. You should submit your
statement to the Senate Committee on Governmental Affairs and the House
Committee on Government Reform within 60 days of the date of this
report. A written statement must also be sent to the House and Senate
Committees on Appropriations with the agency‘s first request for
appropriations made more than 60 days after the date of the report.
This report is intended for use by the management of IRS. We are
sending copies to Chairmen and Ranking Minority Members of the Senate
Committee on Appropriations; Senate Committee on Finance; Senate
Committee on Governmental Affairs; Senate Committee on the Budget;
Subcommittee on Treasury and General Government, Senate Committee on
Appropriations; Subcommittee on Taxation and IRS Oversight, Senate
Committee on Finance; and the Subcommittee on Oversight of Government
Management, Restructuring, and the District of Columbia, Senate
Committee on Governmental Affairs. We are also sending copies to the
Chairmen and Ranking Minority Members of the House Committee on
Appropriations; House Committee on Ways and Means; House Committee on
Government Reform; House Committee on the Budget; Subcommittee on
Treasury, Postal Service, and General Government, House Committee on
Appropriations; Subcommittee on Government Efficiency, Financial
Management, and Intergovernmental Relations, House Committee on
Government Reform; and the Subcommittee on Oversight, House Committee
on Ways and Means. In addition, we are sending copies of this report to
the Chairman and Vice-Chairman of the Joint Committee on Taxation, the
Secretary of the Treasury, the Director of the Office of Management and
Budget, the Chairman of the IRS Oversight Board, and other interested
parties. Copies will be made available to others upon request. The
report is also available on GAO‘s internet homepage at [hyperlink,
http://www.gao.gov].
We acknowledge and appreciate the cooperation and assistance provided
by IRS officials and staff during our audit of IRS‘s fiscal year 2001
and 2000 financial statements. If you have any questions or need
assistance in addressing these matters, please contact Charles Payton,
Assistant Director, at (213) 830-1084.
Sincerely yours,
Signed by:
Steven J. Sebastian:
Director:
Financial Management and Assurance:
[End of correspondence]
Enclosure I:
Department Of The Treasury:
Internal Revenue Service:
Deputy Commissioner:
Washington, D.C. 20224:
June 20, 2002:
Mr. Steven J. Sebastian:
Acting Director:
Financial Management and Assurance:
U.S. General Accounting Office:
441 G Street, NW:
Washington, DC 20548:
Dear Mr. Sebastian:
I am responding to your draft of the FY 2001 management letter
entitled, Management Letter: Improvements Needed in IRS's Accounting
Procedures and Internal Controls.
I agree we need to continue to improve accounting procedures and
internal controls. In fact, management has already begun addressing
several of the areas your recommendations cover. However, I disagree,
in part, with some of the issues you raised. The following are our
specific comments on each recommendation.
Recommendation: We recommend that you direct IRS management to develop
and implement policies and procedures to require that field office
employees provide taxpayer receipts for all walk-in payments; field
offices post signs in the most visible locations to remind taxpayers to
obtain receipts for payments; two employees be present when payments
are collected and logged from drop boxes; IRS and lockbox employees
performing final candling record receipts in a control log at the time
of discovery, recording at a minimum the total number of payments
found, the amount of each payment, and the taxpayer who submitted the
payment; and IRS and lockbox managers or designated officials reconcile
logs of payments found during final candling to the related receipts
and documents.
We also recommend that you direct IRS headquarters management to ensure
that field office management comply with existing receipt control
policies that require a segregation of duties between employees who
prepare control logs for walk-in payments and employees who reconcile
the control logs to the actual payments.
Comments: We have taken the following corrective actions to address
this finding:
1) Revised Document 10161 to indicate a receipt is available upon
request and posted signs in all Taxpayer Assistance Centers (TAC) or
field offices notifying taxpayers that they can request a receipt.
2) Distributed to TAC sites or field offices a procedural memo
outlining separation of duties to emphasize the need to have more than
one employee process drop box payments.
3) Established a task force to develop procedures to reconcile payment
logs. We expect to issue procedures to TAC or field offices by October
1, 2002. SB/SE will work with W&l to ensure we include these changes in
Lockbox Processing Guidelines for January 2003. This will also be an
agenda item for discussion at the 2002 Lockbox Conference in August
2002.
Recommendation: We recommend that you direct IRS headquarters
management to clarify that the intent of the requirement for background
investigations is meant to apply to personnel being entrusted with
taxpayer receipts and information rather than just personnel being
granted access to an IRS facility.
Comments: [See comment 1] We disagree with GAO's finding that IRS
service centers did not verify that couriers transporting bank deposits
were insured. The IRS has always required courier service employees to
be licensed, insured, or bonded. However, we agree that courier service
employees should undergo background checks. We are working with FMS to
modify courier service contracts. For example, we will amend IRM
3.8.45, Campuses Deposit Activity, courier service minimum requirements
(effective August 1, 2002) to include the following language:
A. Courier Service
Shall ensure that courier service employees designated to transport
Internal Revenue Service deposits and/or requiring access to Internal
Revenue sites satisfy the requirements for a Basic Investigation, which
includes a FBI Fingerprint and Name check, as defined in IRM
1.23.2.2.8.1.1.
Recommendation: We recommend that you direct IRS management to work
with the National Finance Center (NFC) to resolve the technical
limitations that exist within the SETS database and continue to
periodically review SETS data to detect and correct errors.
Comments: All NFC contact is facilitated through the Office of Human
Resource Enterprise Systems (OHRES), Department of the Treasury. We
will prepare a letter for the Chief, Agency-Wide Shared Services'
signature addressed to the Director, OHRES requesting assistance to
establish a dialogue with NFC to address SETS issues. The goal of this
action is to make SETS a better tool for tracking fingerprints and
background investigations. We will submit the letter to Treasury by
June 28, 2002.
Personnel offices must review SETS data monthly and ensure its accuracy
and compliance with IRS' fingerprint policies. We concluded three days
of personnel training on June 6, 2002, that focused on managing the
fingerprint and background investigation program and devoted a module
to analyzing SETS data. All 23 personnel offices were represented, with
approximately 40 individuals in attendance.
Recommendation: We recommend that you direct IRS management to issue a
formal reminder of existing IRS manual refund procedures to supervisors
and staff.
Comments: We issued an Information Alert on December 6, 2001, with the
following procedures:
W&I or SB/SE (depending on the taxpayer) will monitor all manual
refunds to ensure we issue no duplicate refunds and post the manual
refund, and will document the monitoring actions. Management will
review and document their review to ensure monitoring for duplicate
refunds is ongoing until the manual refund posts to the applicable
account.
Recommendation: We recommend that you direct IRS management to
establish procedures to track the release of liens up to the point of
delivery to the local jurisdiction to ensure liens are released timely
to avoid unduly burdening the taxpayer once they have satisfied their
tax liability.
Comments: We agree that failure to timely release liens can cause undue
hardship and additional burden on taxpayers. We also agree procedures
should include monitoring the mailing of certificates of release after
the Automated Lien System (ALS) generates the certificate.
Our ALS units normally print and mail certificates of release. Some
locations are able to electronically transmit liens and releases to the
recording official, a process that works efficiently and with little
delay. In those locations requiring manual processing of paper
documents, we have determined that our offices mail certificates of
release at least weekly. Some offices mail these certificates daily. We
not only depend on our own procedures for mailing but we also depend
upon the United States Postal Service (USPS) to deliver the release to
the recording jurisdictions within established timeframes. We also
depend on the recording jurisdiction to record certificates of release
promptly after receipt.
We accept full responsibility for generating certificates of release
and transmitting them to the appropriate recording official, by mail or
electronic transfer, within the timeframes established by law. To
further ensure we accomplish these actions within established
timeframes, including document mailing, we are formulating procedures
requiring a date stamp (mailing date) on the billing voucher. This
document lists each release we send to the recording official. When we
issue these procedures to the field, we will re-emphasize the need to
timely accomplish all other processing steps.
We believe these procedures will further reduce taxpayer burden. Those
processes outside the IRS' control (USPS and recording jurisdictions)
continue to add risk and contribute to additional taxpayer burden.
Recommendation: We recommend that you direct IRS management to ensure
that complete skeletal records are created and available for the SPIF
units to update upon receipt of P&E, and develop and implement
procedures and edit checks to reduce the likelihood of invalid property
records.
Comments: We agree with this recommendation and are developing
requirements to implement an Electronic Packing Slip to address it. We
will require vendors to forward, in an electronic format, specific
information pertaining to equipment purchases at the time of shipment.
We will use this information to build the skeletal records prior to the
equipment arriving on site. In conjunction with this effort, we are
developing policies and procedures to track these skeleton records and
follow up with appropriate sites after a determined length of time to
ensure timeliness of record updates. We will include these procedures
in the IRM. In addition, we are currently reviewing the database for
data anomalies and following up with appropriate areas for corrections.
This also triggers process and procedural improvements to prevent
future anomalies. We are also expanding our use of Network monitoring
tools to track asset activity and are refining transactional business
rules to enhance and tighten data validation prior to its entry into
the database. Shortly, we will have the capability to implement mass
updates of asset transactions.
Recommendation: We recommend that you direct IRS management to develop
and implement procedures to ensure that procurement award and
requisition numbers recorded on property records are complete,
accurate, and linked to the accounting records.
Comments: We agree with this recommendation. The Electronic Packing
Slip mentioned above will also require vendors to include requisition
and procurement numbers of equipment purchases at the time of shipment.
We will use this information to build the skeletal records prior to the
equipment arriving on site. Full integration of inventory procurement
and accounting will occur with the implementation of the Integrated
Financial System.
Recommendation: We recommend that you direct IRS management to record
software licenses in IRS' property management system, and develop an
approach to assess IRS's compliance, with the terms of these software
licenses.
Comments: We agree with this recommendation. We are executing an action
plan that will allow us to populate the existing software data into the
Information Technology and Asset Management Systems (ITAMS) database.
Included in this action plan is the repeatable process that will inform
the Asset Management office of new licenses as we purchase them so we
can include them in the database within established timeframes. We are
also developing an action plan that will set procedures and policies
for the review and compliance to the terms of the licenses.
Recommendation: In addition to fully implementing our previous
recommendations regarding more effective review of reimbursable
receivables, we recommend that you direct IRS management to ensure
that, in the absence of an integrated general ledger system for IRS's
custodial and administrative activities, IRS strengthen monitoring and
analysis of receivables to ensure that receivables are not being
erroneously recorded as a result of the lack of integration between
these two activities.
Comments: We agree with your recommendation and have taken steps to
better manage reimbursable activity. We are reconciling all
reimbursable receivable accounts with the appropriate general ledger
accounts monthly. We are monitoring activities between custodial and
administrative accounts as part of this reconciliation process. This
reconciliation process will ensure that we do not reflect intra-agency
transfers as receivables from an outside party. We now have a process
in place to routinely review open receivables and take action to write
off amounts as appropriate. We are also developing and testing new AFS
transactions to properly record activity affecting prior year accounts,
which was the cause of the overstatement of the two specific
reimbursable receivables identified in your FY 2001 audit.
Recommendation: GAO did not cite a specific new recommendation relative
to IRS's need to develop procedures to estimate and accrue operating
revenue and expenses. However, they did note that they have made
recommendations on this topic in the past and the importance of
addressing this issue in light of the need to prepare interim financial
reports.
Comments: We agree we must estimate and accrue operating expenses in a
timely manner. The ultimate goal is to accrue monthly during the year.
We began recording quarterly accruals for actuarial FECA (worker's
compensation), accrued annual leave, and imputed interest costs in FY
2002 and plan to do so monthly in the near future. We disagree that we
should estimate revenue from user fees and record it on a pro forma
basis during the year. In FY 2002, we began recording actual revenues
from user fees in our administrative accounts quarterly.
I appreciate your input and will continue to take the necessary steps
to improve our financial management. With the continued dedication and
cooperation of both our staffs, we will further enhance accounting
procedures and internal controls.
Sincerely,
Signed by:
Bob Wenzel:
[End of letter]
The following is GAO‘s comment on the Internal Revenue Service‘s letter
dated June 20, 2002.
GAO Comment:
1. We have deleted material on this topic from our report.
[End of enclosure]
Enclosure II:
GAO Contacts and Staff Acknowledgments:
GAO Contacts:
Ted Hu, (213) 830-1108:
David Elder, (213) 830-1112:
Acknowledgments:
Staff making key contributions to this report were: Beverly Burke,
Gloria Cano, William Cordrey, John Davis, Charles R. Fox, Meafelia
Gusukuma, Eric D. Johns, George Jones, Delores Lee, Angel Sharma, and
Leonard Zapata.
[End of enclosure]
Footnotes:
[1] U.S. General Accounting Office, Financial Audit: IRS‘s Fiscal Year
2001 and 2000 Financial Statements, GAO-02-414 (Washington D.C.: Feb.
27, 2002).
[2] IRS provides goods and services to federal agencies, state and
foreign governments, and private organizations on a reimbursable cost
basis. Payments due to IRS for these activities are referred to as
reimbursable receivables.
[3] GAO-02-414.
[4] U.S. General Accounting Office, Internal Revenue Service: Physical
Security Over Taxpayer Receipts and Data Needs Improvement, GAO/AIMD-99-
15 (Washington D.C.: Nov. 30, 1998); U.S. General Accounting Office,
Internal Revenue Service: Custodial Financial Management Weaknesses,
GAO/AIMD-99-193 (Washington D.C.: Aug. 4, 1999); U.S. General
Accounting Office, Internal Revenue Service: Recommendations to Improve
Financial and Operational Management, GAO-01-42 (Washington D.C.: Nov.
17, 2000); and U.S. General Accounting Office, Internal Revenue
Service: Progress Made, but Further Actions Needed to Improve Financial
Management, GAO-02-35 (Washington D.C.: Oct. 19, 2001).
[5] Walk-in taxpayers are individual taxpayers who choose to conduct
business with IRS in person. Generally, these individuals are directed
to the IRS field offices which have units set up to handle questions
and accept payments from such taxpayers.
[6] Final candling occurs at the end of the mail extraction process.
After contents from envelopes are extracted, IRS staff illuminate, or
’candle“ all envelopes which have already gone through the extraction
process to ensure that all contents are actually removed prior to
the envelopes‘ destruction.
[7] A lockbox refers to a commercial bank with a designated post office
box to which taxpayers are instructed to mail their payments and
related tax documents. These lockbox banks process the documents,
deposit the payments, then forward the documents and data to IRS
service center campuses to update the taxpayers‘ accounts. Treasury‘s
Financial Management Service (FMS) has agreements with nine lockbox
bank locations on IRS‘s behalf.
[8] GAO/AIMD-99-15, GAO/AIMD-99-193, GAO-01-42, and GAO-02-35.
[9] U.S. General Accounting Office, Internal Revenue Service: Immediate
and Long-Term Actions Needed to Improve Financial Management, GAO/AIMD-
99-16 (Washington D.C.: Oct. 30, 1998) and GAO-01-42.
[10] IRS issues most refunds through an automated system; however,
refunds meeting certain criteria are separated for manual processing,
including (1) refunds over $1 million, (2) refunds below $1, and (3)
refunds based on a taxpayer‘s request for immediate payment due to
hardship.
[11] The master file is a detailed database containing taxpayer
information.
[12] IRS uses ALS to issue and release federal tax liens. ALS is
updated for new liens and tax accounts by revenue officers at IRS‘s
field offices. ALS generates a certificate of release of lien
automatically for liens that expire after a set period of time or when
the statutory collection period for an account expires. For accounts
that are fully paid or otherwise satisfied, ALS generates the
certificate of release of lien only after it receives the ’fully paid“
status of the account through a weekly interface with the master file.
The certificate of release of lien is sent to the county courthouse
where the lien was originally filed for formal release of the lien.
[13] We are 95 percent confident that the confidence interval around
this estimate ranges from 3 to 19 percent.
[14] GAO-02-414. As explained in this report, in a book-to-floor
sample, we were unable to locate 25 of 210 recorded assets and
concluded that IRS‘s P&E records were not adequate to maintain
accountability over its property.
[15] For our floor-to-book sample, we obtained a representative
selection of P&E items with a two-stage cluster sample. In the first
stage, we selected a representative sample of 21 buildings. In the
second stage, we selected a sample of 10 assets located at each of the
21 buildings and traced them to the inventory records.
[16] In some cases, sample transactions, which are disbursement
amounts, were payments for multiple P&E items. For example, one sample
transaction totaling $466,020 was a disbursement for purchase of 180
computers with keyboards, mouses, and monitors.
[17] U.S. General Accounting Office, Management Letter: Improvements
Needed in IRS‘ Accounting Procedures and Internal Controls, GAO-01-880R
(Washington D.C.: July 30, 2001).
[18] GAO-01-880R.
[19] Imputed costs are IRS costs that have been paid in part or in full
by other entities.
[20] GAO-02-35.
[End of section]
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To order by Phone:
Voice: (202) 512-6000:
TDD: (202) 512-2537:
Fax: (202) 512-6061:
To Report Fraud, Waste, and Abuse in Federal Programs Contact:
Web site: [hyperlink, http://www.gao.gov/fraudnet/fraudnet.htm]:
E-mail: fraudnet@gao.gov:
Automated answering system: (800) 424-5454 or (202) 512-7470:
Public Affairs:
Jeff Nelligan, managing director, NelliganJ@gao.gov:
(202) 512-4800:
U.S. General Accounting Office:
441 G Street NW, Room 7149:
Washington, D.C. 20548:
