Financial Audit
IRS's Fiscal Years 2009 and 2008 Financial Statements Gao ID: GAO-10-176 November 10, 2009Because of the significance of Internal Revenue Service (IRS) collections to overall federal receipts and, in turn, to the consolidated financial statements of the U.S. government, which Government Accountability Office (GAO) is required to audit, and Congress's interest in financial management at IRS, GAO audits IRS's financial statements annually to determine whether (1) the financial statements are fairly stated, and (2) IRS management maintained effective internal control over financial reporting. GAO also tests IRS's compliance with selected provisions of significant laws and regulations and its financial systems' compliance with the Federal Financial Management Improvement Act of 1996 (FFMIA).
GAO's opinion, IRS's fiscal years 2009 and 2008 financial statements are fairly presented in all material respects. However, serious internal control and financial management systems deficiencies continued to make it necessary for IRS to use resource-intensive compensating processes to prepare its balance sheet. Because of these and other deficiencies, IRS did not, in GAO's opinion, maintain effective internal control over financial reporting as of September 30, 2009, and thus did not provide reasonable assurance that losses and misstatements material to the financial statements would be prevented, or detected and corrected timely. During fiscal year 2009, IRS continued to make significant strides in addressing its internal control deficiencies. Specifically, IRS sufficiently addressed several issues constituting its material weakness over financial reporting and its significant deficiency over tax revenue collection and refund issuance such that we do not consider the remaining unresolved issues in those areas to constitute reportable deficiencies in internal control. However, continued management commitment and sustained efforts are necessary to build on the progress made to date and to fully address IRS's remaining internal control, compliance, and system deficiencies. These remaining deficiencies pertain to IRS's (1) material weaknesses in internal control over unpaid tax assessments and over information security, (2) noncompliance with the law concerning the timely release of tax liens, and (3) financial management systems' nonconformance with FFMIA requirements. The serious challenges IRS faces as a result of these remaining deficiencies adversely affect IRS's ability to (1) produce reliable financial statements without significant compensating procedures and (2) obtain current, complete, and accurate information it needs to make well-informed decisions. As IRS continues to progress toward increasingly automated financial management processes, the continued material weakness in internal control over information security that jeopardizes the reliability of the financial information IRS processes could have serious implications for our future ability to determine whether IRS's financial statements are fairly stated. This weakness also continues to significantly increase the risk that sensitive taxpayer information may be compromised. During fiscal year 2009, IRS also continued to face significant financial management challenges in developing and instutionalizing the use of financial management information to assist it in making operational decisions and measuring the effectiveness of its programs. IRS has not fully integrated the use of cost- and revenue-based performance information into its routine management and decision-making processes or in its externally reported performance metrics.
GAO-10-176, Financial Audit: IRS's Fiscal Years 2009 and 2008 Financial Statements
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Report to the Secretary of the Treasury:
United States Government Accountability Office:
GAO:
November 2009:
Financial Audit:
IRS's Fiscal Years 2009 and 2008 Financial Statements:
GAO-10-176:
GAO Highlights:
Highlights of GAO-10-176, a report to the Secretary of the Treasury.
Why GAO Did This Study:
Because of the significance of Internal Revenue Service (IRS)
collections to overall federal receipts and, in turn, to the
consolidated financial statements of the U.S. government, which GAO is
required to audit, and Congress‘s interest in financial management at
IRS, GAO audits IRS‘s financial statements annually to determine
whether (1) the financial statements are fairly stated, and (2) IRS
management maintained effective internal control over financial
reporting. GAO also tests IRS‘s compliance with selected provisions of
significant laws and regulations and its financial systems‘ compliance
with the Federal Financial Management Improvement Act of 1996 (FFMIA).
What GAO Found:
In GAO‘s opinion, IRS‘s fiscal years 2009 and 2008 financial statements
are fairly presented in all material respects. However, serious
internal control and financial management systems deficiencies
continued to make it necessary for IRS to use resource-intensive
compensating processes to prepare its balance sheet. Because of these
and other deficiencies, IRS did not, in GAO‘s opinion, maintain
effective internal control over financial reporting as of September 30,
2009, and thus did not provide reasonable assurance that losses and
misstatements material to the financial statements would be prevented,
or detected and corrected timely.
During fiscal year 2009, IRS continued to make significant strides in
addressing its internal control deficiencies. Specifically, IRS
sufficiently addressed several issues constituting its material
weakness over financial reporting and its significant deficiency over
tax revenue collection and refund issuance such that we do not consider
the remaining unresolved issues in those areas to constitute reportable
deficiencies in internal control. However, continued management
commitment and sustained efforts are necessary to build on the progress
made to date and to fully address IRS‘s remaining internal control,
compliance, and system deficiencies. These remaining deficiencies
pertain to IRS‘s (1) material weaknesses in internal control over
unpaid tax assessments and over information security, (2) noncompliance
with the law concerning the timely release of tax liens, and (3)
financial management systems‘ nonconformance with FFMIA requirements.
The serious challenges IRS faces as a result of these remaining
deficiencies adversely affect IRS‘s ability to (1) produce reliable
financial statements without significant compensating procedures and
(2) obtain current, complete, and accurate information it needs to make
well-informed decisions. As IRS continues to progress toward
increasingly automated financial management processes, the continued
material weakness in internal control over information security that
jeopardizes the reliability of the financial information IRS processes
could have serious implications for our future ability to determine
whether IRS‘s financial statements are fairly stated. This weakness
also continues to significantly increase the risk that sensitive
taxpayer information may be compromised.
During fiscal year 2009, IRS also continued to face significant
financial management challenges in developing and instutionalizing the
use of financial management information to assist it in making
operational decisions and measuring the effectiveness of its programs.
IRS has not fully integrated the use of cost- and revenue-based
performance information into its routine management and decision-making
processes or in its externally reported performance metrics.
What GAO Recommends:
Based on prior audits, GAO made numerous recommendations to IRS to
address the internal control and compliance issues that continued to
persist during fiscal year 2009. GAO will continue to monitor IRS‘s
progress in implementing the 136 recommendations that remain open as of
the date of this report, of which 74 relate to the material weakness in
information security.
IRS stated that it is dedicated to improving financial management and
cited several recent achievements. It noted that it has a solid
management team in place to address remaining financial management
challenges and is committed to improving information security as an
ongoing priority.
View [hyperlink, http://www.gao.gov/products/GAO-10-176] or key
components. For more information, contact Steven J. Sebastian at (202)
512-3406 or sebastians@gao.gov.
[End of section]
Contents:
Letter:
Auditor's Report:
Opinion on IRS's Financial Statements:
Opinion on Internal Control:
Compliance with Laws and Regulations:
Systems' Compliance with FFMIA Requirements:
Consistency of Other Information:
Objectives, Scope, and Methodology:
Agency Comments and Our Evaluation:
Management Discussion and Analysis:
Financial Statements:
Required Supplementary Information:
Other Accompanying Information:
Appendix I: Material Weaknesses and Compliance Issues:
Material Weaknesses:
Compliance Issues:
Appendix II: Management's Report on Internal Control over Financial
Reporting:
Appendix III: Comments from the Internal Revenue Service:
Abbreviations:
CDDB: Custodial Detail Data Base:
CFO: Chief Financial Officer:
FFMIA: Federal Financial Management Improvement Act of 1996:
FFMSR: Federal Financial Management System Requirements:
FMFIA: Federal Managers' Financial Integrity Act of 1982:
IFS: Integrated Financial System:
IRACS: Interim Revenue Accounting Control System:
IRS: Internal Revenue Service:
MD&A: Management Discussion and Analysis:
OMB: Office of Management and Budget:
RRACS: Redesign Revenue Accounting Control System:
SGL: U.S. Government Standard General Ledger:
TFRP: Trust Fund Recovery Penalty:
[End of section]
United States Government Accountability Office:
Washington, DC 20548:
November 10, 2009:
The Honorable Timothy F. Geithner:
The Secretary of the Treasury:
Dear Mr. Secretary:
The accompanying report presents the results of our audits of the
financial statements of the Internal Revenue Service (IRS) as of, and
for the fiscal years ending, September 30, 2009, and 2008. We performed
our audits in accordance with the Chief Financial Officers Act of 1990.
This report contains our (1) unqualified opinions on IRS's financial
statements, (2) opinion that IRS's internal control over financial
reporting was not effective as of September 30, 2009, (3) conclusion
that IRS did not comply with one of the legal provisions we tested, and
(4) conclusion that IRS's financial management systems were not in
substantial compliance, as of September 30, 2009, with the requirements
of the Federal Financial Management Improvement Act of 1996. The
accompanying report also discusses other significant issues that we
identified in performing our audit that we believe should be brought to
the attention of IRS management and users of IRS's financial
statements.
During fiscal year 2009, IRS continued to make progress in addressing
its financial management challenges. IRS sufficiently addressed the
internal control deficiencies constituting its material
weakness[Footnote 1] over financial reporting such that we do not
consider the remaining unresolved issues to constitute a reportable
deficiency in internal control. IRS substantially completed developing
traceability of its revenue and refund transactions from its general
ledger to supporting detailed transaction information. However, IRS
continues to experience challenges in developing an adequate general
ledger system and transaction traceability for taxes receivable, and we
have included this deficiency as a component of the material weakness
in internal control over unpaid assessments.
Additionally, during fiscal year 2009, IRS continued to enhance its
ability to develop managerial cost accounting information such that we
no longer consider IRS to have a reportable significant deficiency
[Footnote 2] in internal control over tax revenue and refunds. However,
IRS continues to experience significant financial management challenges
with respect to (1) developing full cost information on the full range
of its programs and activities, (2) institutionalizing the use of cost
accounting agencywide, and (3) developing and routinely using cost-
based (and where appropriate enforcement revenue-based[Footnote 3])
performance metrics to measure the results of its efforts and to assist
in making resource allocation decisions. It is important that IRS
continue to aggressively pursue and expand the financial management
initiatives it has underway in order to achieve comprehensive and
lasting financial management reform.
In fiscal year 2009, as in past years, IRS continued to have material
weaknesses in its internal control over Unpaid Assessments and
Information Security. We continued to find that IRS lacked a subsidiary
ledger for unpaid tax assessments that would allow it to support a
reliable balance for taxes receivable on its balance sheet and the
related compliance assessments and write-off amounts in its required
supplementary information. To compensate for this deficiency, IRS
relies on resource-intensive statistical sampling techniques to
estimate these amounts. In addition, these amounts are not recorded in
IRS's general ledger system for tax-related transactions because they
are the product of this statistical estimation process rather than an
accumulation of individual underlying transactions. As a result, IRS
does not have transaction traceability from these amounts as reported
in its financial statements and required supplementary information
through its general ledger system back to underlying source documents.
Also in fiscal year 2009, IRS's internal control over its information
systems' security continued to be ineffective, particularly as it
relates to controls over access to mission-critical applications and
the often sensitive information they process. As a result, IRS cannot
rely on the internal controls contained in its automated financial
management systems to provide reasonable assurance that, in the absence
of effective compensating procedures, (1) its financial statements,
taken as a whole, are fairly stated, (2) the information IRS relies on
to make decisions on a daily basis is accurate, complete, and timely,
and (3) proprietary financial and taxpayer information is appropriately
safeguarded.
We are sending copies of this report to the Chairmen and Ranking
Members of the Senate Committee on Appropriations; Senate Committee on
Finance; Senate Committee on Homeland Security and Governmental
Affairs; Subcommittee on Financial Services and General Government,
Senate Committee on Appropriations; Subcommittee on Federal Financial
Management, Government Information, Federal Services, and International
Security, Senate Committee on Homeland Security and Governmental
Affairs; House Committee on Appropriations; House Committee on Ways and
Means; House Committee on Oversight and Government Reform; Subcommittee
on Financial Services and General Government, House Committee on
Appropriations; and Subcommittee on Government Management,
Organization, and Procurement, House Committee on Oversight and
Government Reform. We are also sending copies of this report to the
Chairman and Vice Chairman of the Joint Committee on Taxation, the
Commissioner of Internal Revenue, the Director of the Office of
Management and Budget (OMB), the Chairman of the IRS Oversight Board,
and other interested parties. The report is available at no charge on
GAO's Web site at [hyperlink, http://www.gao.gov].
If you have any questions concerning this report, please contact me at
(202) 512-3406 or sebastians@gao.gov. Contact points for our Offices of
Congressional Relations and Public Affairs may be found on the last
page of this report.
Sincerely yours,
Signed by:
Steven J. Sebastian:
Director Financial Management and Assurance:
[End of section]
United States Government Accountability Office:
Washington, DC 20548:
To the Commissioner of Internal Revenue:
In accordance with the Chief Financial Officers (CFO) Act of 1990,
[Footnote 4] we are responsible for conducting audits of the financial
statements of the Internal Revenue Service (IRS). The financial
statements report the assets, liabilities, net position, net costs,
changes in net position, budgetary resources, and custodial activity
related to IRS's administration of its responsibilities for
implementing federal tax legislation. The financial statements do not
include an estimate of the amount of taxes that are owed the federal
government but have not been paid by taxpayers, often referred to as
the tax gap,[Footnote 5] nor do they include information on tax
expenditures.[Footnote 6]
In our audits of IRS's fiscal years 2009 and 2008 financial statements,
we found:
* the financial statements are presented fairly, in all material
respects, in conformity with U.S. generally accepted accounting
principles;
* IRS's internal control over financial reporting was not effective as
of September 30, 2009;
* IRS did not comply with one of the legal provisions we tested; and:
* IRS's financial management systems were not in substantial compliance
with the requirements of the Federal Financial Management Improvement
Act of 1996 (FFMIA)[Footnote 7] as of September 30, 2009.
In its role as the nation's tax collector, IRS has a demanding
responsibility in collecting taxes, processing tax returns, and
enforcing the nation's tax laws. IRS is a large and complex
organization, posing unique operational and financial management
challenges for its management. IRS employs over 100,000 people in its
Washington, D.C., headquarters and over 700 offices in all states and
territories and some U.S. embassies and consulates. In fiscal years
2009 and 2008, IRS collected about $2.3 trillion and $2.7 trillion,
respectively, in tax payments, processed hundreds of millions of tax
and information returns, and paid about $438 billion and $426 billion,
respectively, in refunds to taxpayers.
In fiscal year 2009, for the 10th consecutive year, IRS was able to
produce financial statements covering its tax administration and nontax
administrative activities that are fairly stated in all material
respects. IRS also continued to make progress in modernizing its
financial management capabilities and in addressing its financial
management challenges.
In our November 2008 report on the results of our audit of IRS's fiscal
years 2008 and 2007 financial statements,[Footnote 8] we reported a
material weakness[Footnote 9] in IRS's internal control over financial
reporting. Specifically, we reported that IRS (1) did not have an
adequate general ledger system for tax-related transactions and (2) was
unable to readily determine the costs of its discrete activities and
programs. In fiscal year 2008, we also reported a significant
deficiency[Footnote 10] in IRS's internal control over tax revenue and
refunds. In particular, we reported that IRS did not have cost-benefit
(return-on-investment) information on its programs and activities or
the structures and processes to provide such key financial management
data to IRS managers. During fiscal year 2009, IRS (1) substantially
completed developing traceability of its revenue and refund
transactions from its general ledger to supporting detailed transaction
information[Footnote 11] and (2) continued to develop its cost
accounting capabilities. IRS also developed (1) full cost information
on numerous additional IRS programs and activities, (2) measures of the
cost-benefit on the enforcement programs for which it developed full
cost information, and (3) a plan to standardize the use of cost
information agencywide. IRS made sufficient progress during fiscal year
2009 in addressing the outstanding internal control deficiencies over
financial reporting and over tax revenue and refunds such that we no
longer consider the remaining issues in those areas to be reportable
deficiencies in internal control.
However, during fiscal year 2009, IRS continued to have a material
weakness in its internal control over unpaid assessments.[Footnote 12]
This material weakness results from IRS control deficiencies concerning
its (1) inability to rely on its core financial system and underlying
subsidiary records to report taxes receivable, compliance assessments,
and write-offs in accordance with federal accounting standards without
significant compensating procedures,[Footnote 13] (2) lack of
transaction traceability for the reported balance in taxes receivable
that comprises nearly 80 percent of IRS's total assets as of September
30, 2009, and an effective transaction-based subledger for unpaid tax
assessment transactions, and (3) inability to effectively prevent or
timely detect and correct errors in taxpayer accounts. These internal
control weaknesses are caused primarily by IRS's continued reliance on
software applications that were not designed to provide the accurate,
complete, and timely transaction-level financial information that
management needs to make well-informed decisions, or to accumulate and
report financial information in accordance with federal accounting
standards. These problems are likely to continue to exist until these
software applications are either significantly enhanced or replaced.
Successfully addressing these issues is vital and is one of the goals
of IRS's ongoing systems modernization effort.
In addition, we consider the internal control deficiencies that IRS
experienced in fiscal year 2009 and in previous years in its management
of information systems security to continue to be a material weakness
in internal control. IRS made progress during fiscal year 2009 in
addressing several of the information security weaknesses identified in
our previous audits. Specifically, IRS (1) documented approved access
privileges for its mainframe user groups, (2) implemented role-based
access controls to reduce the number of users with special privileged
access on the system supporting its administrative accounting system,
and (3) changed vendor-supplied database accounts and passwords to
avoid potential use by malicious users. Nevertheless, persistent,
serious deficiencies in IRS's controls over information security remain
uncorrected. Those deficiencies (1) render IRS unable to rely upon
these controls to provide reasonable assurance that its financial
statements are fairly stated in the absence of effective compensating
procedures, (2) have serious adverse implications related to the
reliability of other financial management information produced by IRS's
systems, and (3) increase the risk that confidential IRS and taxpayer
information will be compromised.
As IRS continues to increase the automation of accounting and reporting
processes, the need for effective security over the data these systems
process becomes increasingly more critical. Absent effective
information security, confidential taxpayer records will remain at risk
and both IRS's management and we, as IRS's auditors, will continue to
be unable to rely on the automated controls built into these systems to
assist in obtaining reasonable assurance that the reported balances
generated by them are reliable. Opportunities for us to use the types
of alternate audit procedures we have applied in the past to compensate
for this condition, such as reviewing comparisons between automated
systems and utilizing remaining hard-copy records, continue to diminish
as IRS's modernization efforts progress. If IRS does not resolve its
information security material weakness before these options disappear,
it could have serious adverse implications for our ability to determine
whether IRS's financial statements are fairly stated. In addition, as
IRS continues to modernize its computer-based administrative processes,
it will be important for IRS management to ensure that paperless
transactions using electronic signatures are appropriately implemented.
As part of the Office of Management and Budget's (OMB) implementation
of the Government Paperwork Elimination Act, OMB procedures and
guidance caution agencies to carefully control access to electronic
data associated with paperless transactions.[Footnote 14]
During fiscal year 2009, IRS continued to face significant financial
management challenges in developing and instutionalizing the use of
financial information to assist it in making operational decisions and
measuring the effectiveness of its programs. The Federal Accounting
Standards Advisory Board's (FASAB) Statement of Federal Financial
Accounting Concepts No. 1, Objectives of Federal Financial Reporting,
[Footnote 15] in its discussion of financial reporting concepts, notes
that federal financial data should provide accountability and decision-
useful information on the costs of various programs and the outputs and
outcomes achieved, and it should provide data for evaluating service
efforts, costs, and accomplishments. A key objective of the CFO Act is
for agencies to routinely provide and ensure the use of appropriate
financial management information needed to evaluate program
effectiveness, make fully informed operational decisions, and ensure
accountability.
In fiscal year 2009, the financial information available to IRS's
program managers and reported externally in its Management Discussion
and Analysis (MD&A) did not fully meet these objectives. IRS had not
yet fully integrated the use of cost-based (and when appropriate,
revenue-based) performance information into its routine management and
decision-making processes or in its externally reported performance
metrics. Specifically, IRS had not (1) developed full cost[Footnote 16]
information on the range of IRS programs and activities that could
provide important resource allocation--related information; (2)
completed the process of institutionalizing the use of its cost
accounting policy; and (3) developed cost-based (and when appropriate,
revenue-based) performance metrics for its programs and activities.
These limitations inhibit IRS's ability to more fully assess and
monitor the relative merits of its various programs, especially its
enforcement programs and new initiatives, and to consider alternatives
and adjust its strategies as needed.
We acknowledge that IRS may face significant challenges in developing
such data, especially cost-benefit (return-on-investment) performance
metrics. However, doing so would better position IRS to evaluate the
effectiveness of its programs and work activities, optimize the
allocation of resources among them, provide better information with
which to defend its budgets, and evaluate alternative strategies. To
date, IRS's CFO officials have provided significant leadership in
developing and promoting the awareness of these challenges throughout
IRS. Continued visible support and leadership from those officials as
well as the involvement of IRS's business operating division executives
and other officials remains essential.
Although levels of electronic filing of tax and information returns
have been steadily increasing, IRS also faces an ongoing management
challenge due to the millions of hard-copy tax returns it continues to
receive and process each year, along with hundreds of billions of
dollars in associated taxpayer payments received. As long as IRS
continues to receive such large volumes of hard-copy taxpayer payments
and supporting data, there will continue to be a significant risk to
the government and taxpayers alike that loss of receipts or
inappropriate disclosure or compromise of taxpayer information may
occur during this process. Safeguarding these taxpayer receipts and
associated taxpayer information to prevent such events are among IRS's
most important and demanding responsibilities, and congressional and
taxpayer expectations in this regard are justifiably high. Thus, it is
critical that IRS maintain effective internal control to mitigate this
risk, including ongoing monitoring of key internal controls to verify
that they do not deteriorate over time.
Opinion on IRS's Financial Statements:
IRS's financial statements including the accompanying notes present
fairly, in all material respects, in conformity with U.S. generally
accepted accounting principles, IRS's assets, liabilities, and net
position as of September 30, 2009 and 2008; and its net costs; changes
in net position; budgetary resources; and custodial activity for the
fiscal years then ended.
However, misstatements may nevertheless occur in other financial
information reported by IRS and not be detected as a result of the
internal control deficiencies described in this report.
IRS's financial statements include tax revenues collected during the
fiscal year as well as the total unpaid taxes for which IRS and the
taxpayers or courts agree on the amounts owed. Cumulative unpaid tax
assessments for which there is no future collection potential or for
which there is no agreement on the amounts owed are not reported in the
financial statements. Rather, they are reported as write-offs and
compliance assessments, respectively, in required supplemental
information to IRS's financial statements. Also, in conformity with
U.S. generally accepted accounting principles, to the extent that taxes
owed in accordance with the nation's tax laws are not reported by
taxpayers and are not identified through IRS's various enforcement
programs, they are not reported in the financial statements nor in
required supplemental information to the financial statements.
Additionally, in conformity with U.S. generally accepted accounting
principles, tax expenditures, which represent the amount of revenue the
government forgoes resulting from federal tax law provisions that (1)
allow a special exclusion, exemption, or deduction from gross income,
or (2) provide a special credit, preferential rate, or deferred tax
liability, are not reported in the financial statements but rather are
presented as other accompanying information.
Opinion on Internal Control:
Because of the two material weaknesses in internal control discussed
below, IRS did not maintain, in all material respects, effective
internal control over financial reporting as of September 30, 2009, and
thus did not provide reasonable assurance that losses and misstatements
would be prevented or detected and corrected on a timely basis. Our
opinion is based on criteria established under 31 U.S.C. sec. 3512 (c),
(d), commonly known as the Federal Managers' Financial Integrity Act of
1982 (FMFIA).
Despite its material weaknesses in internal control and its systems
deficiencies, IRS was able to prepare financial statements that were
fairly stated in all material respects for fiscal years 2009 and 2008.
Nonetheless, IRS continues to face the following key issues that
represent material weaknesses in internal control:
* Weaknesses in internal control over unpaid tax assessments, resulting
in IRS's inability to properly manage unpaid tax assessments and
rendering IRS unable to rely on its core financial management system
for tax-related transactions and its underlying subsidiary records to
report taxes receivable, compliance assessments, or write-offs in
accordance with federal accounting standards. These issues also lead to
increased taxpayer burden.
* Weaknesses in internal control over information security, resulting
in IRS's inability to rely on the controls embedded in its automated
financial management systems to provide reasonable assurance that (1)
the financial statements are fairly stated in accordance with U.S.
generally accepted accounting principles, (2) financial information
management relies on to support day-to-day decision-making is current,
complete, and accurate, and (3) proprietary information processed by
these automated systems is appropriately safeguarded. These issues
increase the risk of unauthorized individuals accessing, altering, or
abusing proprietary IRS programs and electronic data and taxpayer
information.
These material weaknesses in internal control may adversely affect any
decision by IRS's management that is based, in whole or in part, on
information that is inaccurate because of these deficiencies. In
addition, unaudited financial information reported by IRS, including
budget information, may also contain misstatements resulting from these
deficiencies. The issues constituting these material weaknesses were
encompassed in the material weaknesses reported by IRS in (1) its
fiscal year 2009 FMFIA assurance statement to the Department of the
Treasury, and (2) Management's Report on Internal Control over
Financial Reporting. We considered the material weaknesses identified
above in determining the nature, timing, and extent of our audit
procedures on IRS's fiscal years 2009 and 2008 financial statements. We
caution that misstatements may occur and not be detected by our tests
and that such testing may not be sufficient for other purposes.
We have reported on these material weaknesses in prior audits and have
provided IRS recommendations to address these and other less-
significant issues.[Footnote 17] As of the date of this report, 136
recommendations were still open, of which 12 relate to the material
weakness in internal control over unpaid assessments and 74 relate to
the material weakness in internal control over information security.
IRS continues to make strides in resolving these matters. We will
follow up in future audits to monitor IRS's progress in implementing
these recommendations. For more details on the material weaknesses, see
appendix I.
We also identified other deficiencies in IRS's system of internal
control that we do not consider to be material weaknesses or
significant deficiencies. We have communicated these matters to
management informally and, as appropriate, will be reporting them to
IRS separately.
Compliance with Laws and Regulations:
Our tests of IRS's compliance with selected provisions of laws and
regulations for fiscal year 2009 disclosed one area of noncompliance
that is reportable under U.S. generally accepted government auditing
standards. This area relates to IRS not releasing federal tax liens
against taxpayers' property on time.[Footnote 18] (For more details on
this issue, see app. I.) Except as noted above, our tests for
compliance with laws and regulations disclosed no other instances of
noncompliance that would be reportable under U.S. generally accepted
government auditing standards. However, the objective of our audit was
not to provide an opinion on overall compliance with laws and
regulations. Accordingly, we do not express such an opinion.
Systems' Compliance with FFMIA Requirements:
We found that IRS's financial management systems did not substantially
comply with the three requirements of the Federal Financial Management
Improvement Act of 1996 (FFMIA) as of September 30, 2009.[Footnote 19]
Specifically, IRS's financial management systems did not substantially
comply with Federal Financial Management System Requirements (FFMSR),
federal accounting standards (U.S. generally accepted accounting
principles), and the U.S. Government Standard General Ledger (SGL) at
the transaction level. Our conclusion is based on criteria established
under FFMIA for federal financial management systems, U.S. generally
accepted accounting principles, and the SGL.
The issues resulting in IRS's systems' lack of substantial compliance
with the FFMIA requirements relate to the material weaknesses discussed
above, and were reflected in the material weaknesses reported by IRS in
(1) its fiscal year 2009 FMFIA assurance statement to Department of the
Treasury and (2) Management's Report on Internal Control over Financial
Reporting. IRS's FFMIA remediation plan details its planned corrective
actions for the weaknesses that render its financial management systems
noncompliant with the requirements of FFMIA. For more details on these
issues, see appendix I.
Consistency of Other Information:
IRS's MD&A and other required supplementary and other accompanying
information contain a wide range of information, some of which is not
directly related to the financial statements. We did not audit and do
not express an opinion on this information. However, we compared this
information for consistency with the financial statements and discussed
the methods of measurement and presentation with IRS officials. On the
basis of this limited work, we found no material inconsistencies with
the financial statements, U.S. generally accepted accounting
principles, and OMB Circular No. A-136, Financial Reporting
Requirements.
Objectives, Scope, and Methodology:
Management is responsible for (1) preparing the financial statements in
conformity with U.S. generally accepted accounting principles, (2)
establishing and maintaining effective internal control over financial
reporting and evaluating its effectiveness, (3) ensuring that IRS's
financial management systems substantially comply with FFMIA
requirements, and (4) complying with applicable laws and regulations.
Management evaluated the effectiveness of IRS's internal control over
financial reporting as of September 30, 2009, based on the criteria
established under FMFIA. IRS management provided an assertion
concerning the effectiveness of its internal control over financial
reporting (see appendix II).
We are responsible for planning and performing the audit to obtain
reasonable assurance and provide our opinion about whether (1) the
IRS's financial statements are presented fairly, in all material
respects, in conformity with U.S. generally accepted accounting
principles, (2) IRS management maintained, in all material respects,
effective internal control over financial reporting as of September 30,
2009, and (3) IRS's financial management systems substantially comply
with the three FFMIA requirements. We are also responsible for (1)
testing compliance with selected provisions of laws and regulations
that have a direct and material effect on the financial statements, and
(2) performing limited procedures with respect to certain other
information accompanying the financial statements.
In order to fulfill these responsibilities, we:
* examined, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. This included selecting
statistical samples of unpaid assessments, revenue, refunds, payroll
and nonpayroll expenses, property and equipment, and undelivered order
transactions. These statistical samples were selected primarily to
determine the validity of balances and activities reported in IRS's
financial statements. We projected any errors in dollar amounts to the
population of transactions from which they were selected. In testing
some of these samples, certain attributes were identified that
indicated deficiencies in the design or operation of internal control.
These attributes, where applicable, were statistically projected to the
appropriate populations;
* assessed the accounting principles used and significant estimates
made by management;
* evaluated the overall presentation of the financial statements;
* obtained an understanding of IRS and its operations, including its
internal control over financial reporting;
* considered IRS's process for evaluating and reporting on (1) internal
control over financial reporting based on criteria established under
FMFIA, and (2) financial management systems under FFMIA;
* assessed the risk of (1) material misstatement in the financial
statements and (2) material weakness in internal control over financial
reporting;
* tested relevant internal control over financial reporting;
* evaluated the design and operating effectiveness of internal control
over financial reporting based on the assessed risk;
* tested compliance with selected provisions of the following laws and
regulations: Internal Revenue Code; Antideficiency Act, as amended;
Purpose Statute; Prompt Payment Act; Pay and Allowance System for
Civilian Employees; Federal Employees' Retirement System Act of 1986,
as amended; Social Security Act of 1935, as amended; Federal Employees
Health Benefits Act of 1959, as amended; Continuing Appropriations
Resolution, 2009, as amended; Department of the Treasury Appropriations
Act, 2009; and American Recovery and Reinvestment Act of 2009;
* tested whether IRS's financial management systems substantially
complied with the three FFMIA requirements; and:
* performed such other procedures as we considered necessary in the
circumstances.
An entity's internal control over financial reporting is a process
affected by those charged with governance, management, and other
personnel, the objectives of which are to provide reasonable assurance
that (1) transactions are properly recorded, processed, and summarized
to permit the preparation of financial statements in accordance with
U.S. generally accepted accounting principles, and assets are
safeguarded against loss from unauthorized acquisition, use, or
disposition; and (2) transactions are executed in accordance with the
laws governing the use of budget authority and other laws and
regulations that could have a direct and material effect on the
financial statements.
We did not evaluate all internal control relevant to operating
objectives as broadly established under FMFIA, such as controls
relevant to preparing statistical reports and ensuring efficient
operations. We limited our internal control testing to testing controls
over financial reporting. Because of inherent limitations in internal
control, internal control may not prevent or detect and correct
misstatements due to error or fraud, losses, or noncompliance. We also
caution that projecting any evaluation of effectiveness to future
periods is subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with
policies or procedures may deteriorate.
We did not test compliance with all laws and regulations applicable to
IRS. We limited our tests of compliance to those laws and regulations
that have a direct and material effect on the financial statements for
the fiscal year ended September 30, 2009. We caution that noncompliance
may occur and not be detected by these tests and that such testing may
not be sufficient for other purposes. Also, our work on FFMIA would not
necessarily disclose all instances of noncompliance with FFMIA
requirements.
We performed our audit in accordance with U.S. generally accepted
government auditing standards. We believe our audit provides a
reasonable basis for our opinions and other conclusions.
Agency Comments and Our Evaluation:
In responding to this report, IRS stated that it is dedicated to
continuing to improve its financial management and noted several recent
significant accomplishments in addressing related challenges. IRS
reported that in fiscal year 2009 it (1) conducted A-123 activities by
testing transaction processes material to the Department of the
Treasury's Consolidated Financial Statements, which included 16
administrative processes related to $12 billion in administrative
transactions and 3 custodial tax processes related to $2.3 trillion in
tax revenues; (2) established the CDDB as the subsidiary ledger to
IRACS for revenue and refunds, which provided traceability for 98
percent of all revenue receipts to the detailed taxpayer transactions;
(3) enhanced its financial management structure and processes to
provide key management data on costs and enforcement tax revenue by
publishing an IRS-wide Cost Accounting Manual and developing a plan to
standardize the use of cost measures, and (4) ensured the continuity
and resiliency of critical business processing systems by completing
the development of disaster recovery plans for all general support
systems.
IRS also stated that information security continues to be a priority,
and noted that it had increased the security of IRACS, IFS, and the
Treasury Information Executive Repository environment, by limiting
access to a reduced number of authorized staff. Additionally, IRS
stated it instituted role-based access in financial management systems
and implemented controls to enforce the use of strong passwords in
accordance with the Internal Revenue Manual. Finally, IRS recognized
that challenges remain, but noted that it has a solid management team
dedicated to promoting the highest standard of financial management and
to continuing to increase the focus on information security and
internal controls while improving financial reporting. The complete
text of IRS's response is included in appendix III.
Sincerely yours,
Signed by:
Steven J. Sebastian:
Director Financial Management and Assurance:
November 5, 2009:
[End of section]
Management Discussion and Analysis:
The Interned Revenue Service:
FY 2009 Management Discussion and Analysis:
At A Glance:
"Taxes are the price we pay for living in a civilized society:"
U.S. Supreme Court Justice Oliver Wendell Holmes.
Douglas Shulman became the 47th Commissioner of Internal Revenue on
March 24, 2008. He presides over the nation's tax administration
system, which annually collects over $2.345 trillion in tax revenue
that funds most government operations and public services.
History:
The IRS is one of the oldest bureaus in the United States Government.
Article 1, Section 8 of the Constitution gave the Federal Government
the power to "lay and collect Taxes, Duties, Imposts and Excises, to
pay the Debts and provide for the common Defence and general Welfare of
the United States..." In 1862, President Lincoln and the Congress
established the Bureau of Internal Revenue and the nation's first
income tax. In 1953, the Bureau of Internal Revenue's name was changed
to the Internal Revenue Service (IRS).
Vision:
Funding America's future by strengthening our system of voluntary tax
compliance.
Mission:
Provide America's taxpayers top-quality service by helping them
understand and meet their tax responsibilities and enforce the law with
integrity and fairness to all.
Organization:
The IRS organizational structure (Appendix A) closely resembles the
private sector model of organizing around customers with similar needs.
The scope of IRS operations includes collection of individual and
corporate taxes, examination of returns, taxpayer assistance, as well
as oversight of tax-exempt organizations and the Earned Income Tax
Credit program, the nation's largest federally administered means-
tested benefits program.
Operating Divisions:
* Wage and Investment;
* Small Business and Self-Employed;
* Large and Mid-Size Business;
* Tax-Exempt and Government Entities.
Employees:
The IRS employs over 100,000 employees.
Location:
The IRS is headquartered in Washington, DC. The IRS also has employees
located at over 700 offices in all states and territories and some U.S.
embassies and consulates.
IRS FY 2009 Statistics:
Total Revenue Collected: $2,345 trillion;
Total Enforcement Revenue Collected: $48.9 billion.
Total Refunds: $438 billion;
Number of Hits on IRS.gov: 1.7 billion;
Number of Downloads from IRS.gov: 191 million;
Number of Returns Filed: 236 million;
"Where's My Refund?" Usage: 54 million;
Number of Taxpayers Assisted: 74 million;
Number of Returns Filed Electronically: 106 million.
Financial Resources:
The IRS FY 2009 budget was $11.52 billion in direct appropriations,
supplemented by $175.7 million in user fee revenue and $152.5 million
in reimbursable resources for a total operating level of $11.9 billion.
The IRS also received $80 million in FY 2009 supplemental funding to
execute the expanded Health Coverage Tax Credit (HCTC).
Internet:
he IRS provides tax information, taxpayer services, forms, and
publications at [hyperlink, http://www.irs.gov]
Funding America's Future By Strengthening Our System Of Voluntary Tax
Compliance:
Mission:
Provide America's taxpayers top-quality service by helping them
understand and meet their tax responsibilities and enforce the law
with integrity and fairness to all.
Goals And Objectives:
Improve Service To Make Voluntary Compliance Easier:
* Incorporate taxpayer perspectives to improve all service
interactions;
* Expedite and improve issue resolution across all interactions with
taxpayers, making it easier to navigate the IRS;
* Provide taxpayers with targeted, timely guidance and outreach;
* Strengthen partnerships with tax practitioners, tax preparers, and
other third parties in order to ensure effective tax administration.
Enforce The Law To Ensure Everyone Meets Their Obligation To Pay Taxes:
* Proactively enforce the law in a timely manner while respecting
taxpayer rights and minimizing taxpayer burden;
* Expand enforcement approaches and tools;
* Meet the challenges of international tax administration;
* Allocate compliance resources using a data-driven approach to target
existing and emerging high-risk areas;
* Continue focused oversight of the tax-exempt sector;
* Ensure that all tax practitioners, tax preparers, and other third
parties in the tax system adhere to professional standards and follow
the law.
Strategic Foundations: Invest For High Performance:
* Make the IRS the best place to work in government;
* Build and deploy advanced information technology systems, processes,
and tools to improve IRS efficiency and productivity;
* Use data and research across the organization to make informed
decisions and allocate resources;
* Ensure the privacy and security of data and safety and security of
employees.
IRS Resources:
Funding by Appropriations ($ thousands):
Enforcement: 43%;
Taxpayer Services: 19%;
Health Ins. Tax Credit Administration: Less than 1%;
Business Systems Modernization: 2%;
Operations Support: 33%;
Other: 3%.
In FY 2009, funding for the three core operating appropriations was
allocated as follows:
* Taxpayer Services [$2,293,000]: funds processing tax returns and
related documents, and assistance for taxpayers in filing returns and
paying taxes due.
* Enforcement [$5,117,267]: funds examination of tax returns,
collection of balances, the administrative and judicial settlement of
taxpayer appeals of examination findings, as well as providing
resources for strengthened enforcement to reduce invalid claims and
erroneous filings associated with the Earned Income Tax Credit (EITC)
program.
* Operations Support [$3,876,011]: funds administrative services,
policy management and IRS-wide support. The appropriation also funds
staffing, equipment, and related costs to manage, maintain, and operate
critical information systems that support tax administration.
In addition to the core appropriations, the IRS has the following
appropriations:
* Business Systems Modernization [$229,914]: funds capital asset
acquisitions of information technology systems to modernize key tax
administration systems.
* Health Insurance Tax Credit Administration [$15,406]: funds the
administration of the Health Coverage Tax Credit (HCTC). The IRS also
received a one-time $80 million supplemental appropriation to expand
the participants covered under this program as mandated by the American
Recovery and Reinvestment Act (ARRA) of 2009.
* Other: Mandatory Appropriation (Special Funds): User Fees [$175,700]:
are receipts from payment for services provided and reimbursable
agreements [$152,490].
How IRS Uses its Resources:
Compliance: 64%;
Filing and Account Services: 31%;
Taxpayer Assistance and Education: 4%;
Administration of Health Insurance/Tax Credit Programs: 1%.
The Statement of Net Cost reflects the use of IRS resources in
conducting its major programs. The IRS uses a cost allocation
methodology to assign support and overhead costs to each program
described below. The Statement of Net Cost reports the full cost of
these programs in accordance with the Statement of Federal Financial
Accounting Standards No. 4, "Managerial Cost Accounting."
* Taxpayer Assistance and Education activities include taxpayer
education and outreach, tax publication issuance and distribution.
* Filing and Account Services activities include filing tax returns,
maintaining customer accounts, and processing taxpayer information.
* Compliance activities include pre-filing agreements, document
matching, examination, collection, and criminal investigation
activities.
* Administration of Health Insurance/Tax Credit Programs includes costs
for Earned Income Tax Credit (EITC) and HCTC program activities.
The following table shows FY 2009 and 2008 data on the use of IRS
resources by major programs:
Use of Resources ($ thousands):
Program: Taxpayer Assistance and Education
FY 2009: $555,735;
FY 2008: $622,852.
Program: Filing and Account Services
FY 2009: $3,950,070;
FY 2008: $3,601,581.
Program: Compliance
FY 2009: $8,174,550;
FY 2008: $8,136,464.
Program: Administration of Health Insurance/Tax Credit Programs
FY 2009: $189,685;
FY 2008: $184,344.
[End of table]
Internal Revenue Service:
Management Discussion and Analysis For the Fiscal Year Ended September
30, 2009:
Strategic Plan Update:
The 2009-2013 IRS Strategic Plan lays out the road map for the next
four years. It will keep and build on strong and successful IRS
programs while adapting to a new environment in which IRS interactions
with taxpayers are more complicated.
The IRS must change with the complex and constantly changing
environment in which it operates.
* Accelerating globalization and the development of new business models
challenge IRS efforts to ensure that all businesses pay the taxes they
owe.
* Tax laws are increasingly complex, and the role of tax practitioners
and other third parties is expanding.
* The explosion in technology has raised expectations for new ways to
interact with the IRS and increased security risks.
The Strategic Plan will guide the IRS to deliver a high level of
performance both in how we serve taxpayers and in how we enforce the
tax laws by emphasizing two overarching goals:
Improve service to make voluntary compliance easier:
* Incorporate taxpayer perspectives.
* Expedite resolution of taxpayer issues.
* Provide timely guidance to help all taxpayers pay their fair share.
Enforce the law to ensure everyone meets their obligation to pay taxes:
* Take timely enforcement actions.
* Expand approaches and tools used in compliance activities.
* Improve expertise and coordinating better with international
organizations.
The IRS will support these goals by investing in two strategic
foundations, its people and its technology. To succeed, it will:
* Strive to make the IRS the best place to work in government.
* Provide technology needed to improve efficiency, ensure privacy and
security of data, and target the highest risk areas of tax abuse and
fraud.
Fiscal Year (FY) 2009 Performance:
For the second consecutive year, the IRS achieved an overall success
rate of 69% in meeting or exceeding the targets for 22 of its 32
performance measures. Nine of the ten measures that fell below the
target were within 95 percent of the target. Detailed information on
performance is contained in Appendix B, Performance Measurement Data;
and Appendix C, Explanation of Shortfalls.
Collections related to enforcement activities totaled $48.9 billion, a
30% increase over FY 2003.
Figure: IRS Enforcement Revenue:
[Refer to PDF for image: vertical bar graph]
Fiscal year: 2003;
IRS Enforcement Revenue: $37.6 billion.
Fiscal year: 2004;
IRS Enforcement Revenue: $43.1 billion.
Fiscal year: 2005;
IRS Enforcement Revenue: $47.3 billion.
Fiscal year: 2006;
IRS Enforcement Revenue: $48.7 billion.
Fiscal year: 2007;
IRS Enforcement Revenue: $59.2 billion.
Fiscal year: 2008;
IRS Enforcement Revenue: $56.4 billion.
Fiscal year: 2009;
IRS Enforcement Revenue: $48.9 billion.
During FY 2009, the IRS continued its research studies of filing,
payment and reporting compliance, including the National Research
Program (NRP), to provide a comprehensive picture of overall taxpayer
compliance levels. Research allows the IRS to target specific areas to
improve voluntary compliance and to allocate resources more effectively
to reduce the tax gap. In FY 2009, the NRP included analyzing
individual income tax returns for Tax Years 2006 through 2008 as part
of an ongoing reporting compliance study and studies of employment
taxes and their contribution to the tax gap. The IRS also began a NRP
study to address cases with the highest-compliance risk by providing an
identification process for returns filed by U.S. persons living abroad.
The IRS is studying the effects of its taxpayer services (internet,
walk-in sites, and toll-free hotline) on voluntary compliance including
identifying why taxpayers make errors and exploring the relationships
between errors made and unclear correspondence. Results will be used to
develop new approaches to service.
As part of its continuing effort to measure the burden associated with
meeting Federal tax obligations, the IRS surveyed 7,000 individual and
self-employed taxpayers to measure time and expense in meeting filing
requirements. Efforts are underway to develop models to measure time
and expenses for small-business taxpayers who file income and
employment tax returns. Estimates are scheduled to be released in
FY 2010.
American Recovery and Reinvestment Act (ARRA) of 2009:
The ARRA was signed into law on February 17, 2009. The bill was
intended to create and save jobs, jumpstart the economy, and build the
foundation for long term economic growth.
ARRA includes federal tax credits and expansion of unemployment
benefits that are being implemented by the IRS.
Additionally, the President called on Federal agencies, including the
IRS, to ensure that recovery funds are used for authorized purposes and
every step is taken to prevent instances of fraud, waste, error and
abuse. Therefore, every taxpayer dollar spent on the economic recovery
is subject to unprecedented levels of transparency and accountability.
In FY 2009, to meet these stringent accountability requirements, the
IRS developed a process to assess and mitigate risk to timely implement
each provision. The process includes completion of a risk assessment
for each provision that follows a systematic and disciplined approach
to identify, assess and manage risks to avoid negative consequences as
the provisions are implemented. Once risks have been identified, risk
mitigation plans are established that include steps necessary to
prevent erroneous payments from being made and also to identify any
attempts to commit fraud. Some of the most common steps included in the
IRS mitigation plan are:
* Developing controls to identify questionable claims for tax credits.
* Developing new forms for eligible taxpayers to calculate and claim
tax credits that require proof of eligibility.
* Performing examinations of returns to ensure the credits are being
claimed legitimately.
* Developing screening tools to be used during return processing that
are designed to systemically reject claims for credits if all
validation tests are not met.
American Recovery and Reinvestment Act of 2009 (ARRA):
Upon enactment of ARRA the IRS initiated work on the tax-related
provisions to ensure timely implementation, including:
* Planning before and after passage of the Act to expedite
implementation of immediate and retroactive provisions.
* Establishing comprehensive plans to ensure all Act provisions are
timely implemented.
* Completion of several revised and new products released 3 days after
the bill signing, including:
- New Wage Withholding and Advanced Earned Income Credit Payment Tables
and update to the withholding calculator available on IRS.gov;
- First-Time Homebuyer Claim Form;
- Employer's Quarterly Federal Tax Return;
- Net Operating Loss publications.
* Developing new publications to explain the tax provisions to
individual and business filers.
* Informing taxpayers of the tax credits they may be entitled to
through multiple communication channels including press releases,
television commercials, and updated information on the IRS.gov website.
For the first time, the IRS launched a YouTube video site and an !Tunes
podcast site to provide information on ARRA, tax tips, and how-to
videos.
* Establishing new schedules for Tax Year 2009, Schedule M to calculate
the Making Work Pay and Government Retiree credits, and Schedule L to
help taxpayers complete their 2009 standard deduction based on certain
state and local real estate taxes, net disaster losses, and qualified
motor vehicle taxes.
* Developing updated information and educational materials, detailing
changes to the Health Coverage Tax Credit to be distributed to
taxpayers through IRS partners and stakeholders.
Strategic Goal: Improve Service to Make Voluntary Compliance Easier:
Objectives:
* Incorporate Taxpayer Perspectives To Improve All Service
interactions.
* Expedite And Improve Issue Resolution Across All interactions With
Taxpayers, Making it Easier To Navigate The IRS.
* Provide Taxpayers With Targeted, Timely Guidance And Outreach.
* Strengthen Partnerships With Tax Practitioners, Tax Preparers, And
Other Third Parties In Order To Ensure Effective Tax Administration.
Taxpayer Service Facts:
The IRS improved services through automation, outreach and education of
taxpayers. In FY 2009, taxpayers continued to use the IRS website,
IRS.gov, in record numbers to get current information. Passage of the
First-Time Homebuyer Credit and provisions of the American Reinvestment
and Recovery Act as well as questions on Economic Stimulus Payments
meant the IRS needed to provide real time updated information to
taxpayers as they filed their returns. Notable accomplishments include:
* Provided free tax assistance, including the preparation of over 3.0
million tax returns, at the more than 12,100 Volunteer Income Tax
Assistance (VITA) and Tax Counseling for the Elderly (TCE) sites.
* Established 320 additional VITA sites to provide face-to-face
assistance to a larger population of taxpayers. In FY 2009, the IRS
also served over 6.2 million taxpayers at its 401 TACs.
* Launched Spanish versions of the Free File Program, an interactive
Spanish application for "How much was my Stimulus Payment?", and a
Spanish Tax Practitioner Tool Kit.
* Developed a Recovery Rebate Credit Calculator to help taxpayers who
did not receive a stimulus payment in 2008 determine if they were
eligible for the credit, and if so, how much they could claim. Over
650,000 taxpayers used the calculator.
Improve Service to Make Voluntary Compliance Easier:
Helping taxpayers understand their tax reporting and payment
obligations is the foundation of taxpayer compliance. In FY 2009, the
IRS met or exceeded 100% (12 of 12) of the Taxpayer Service performance
targets.
In FY 2009, the IRS offered new and revised products including notices,
forms, schedules and publications to improve return filing and to
increase the number of taxpayers using electronic filing. The number
and use of volunteers to assist taxpayers in meeting filing
requirements increased as did the geographic locations. Communication
with external stakeholder organizations including tax return preparers
improved as more national and local events were held to share
information on tax law changes and to solicit comments on tax issues
affecting taxpayer groups.
Highlights of the 2009 Filing Season:
The IRS delivered a successful 2009 filing season, rising to challenges
posed by the residual effects of the 2008 Economic Stimulus Payment
program and the implementation of the American Reinvestment and
Recovery Act. Results of the 2009 filing season include:
* Processed 144.4 million individual returns and issued 111.4 million
refunds totaling $339.6 billion.
* Achieved a 70% telephone level of service while answering 39 million
calls.
* Answered 29 million automated calls.
* Correctly responded to 92.9% of tax law questions and 94.9% of
account questions.
* Processed over 3.0 million Free File returns.
* Over 24 million people received approximately $49 billion in Earned
Income Tax Credit.
* Processed over 385,000 First-Time Home Buyer Credit claims, including
amended returns, for the credit totaling over $2.88 billion.
Increased electronic filing over 2008:
* Individual returns electronically filed surpassed 65.9% with the
total number of individual returns filed electronically reaching 95
million, up from 57.6%.
* Business returns electronically filed reached 22.8%, an increase of
1.5 million.
* Home-computer filing increased to 32.2 million returns, a 19%
increase over 2008.
* Tax professional use of e-file increased to 63.2 million returns.
In FY 2009, taxpayers used the IRS website, IRS.gov, to view current
information. The expansion of on-line information, described in the
Taxpayer Assistance Facts, also helped the IRS reach more taxpayers.
For example:
* Over 1.7 billion web pages were viewed.
* More than 54 million taxpayers used "Where's My Refund?," an increase
of 39%, and over 453,000 taxpayers used the Spanish version.
Taxpayer Communications:
Each year, the IRS sends more than 150 million notices to individual
and business taxpayers. It is critical that correspondence provide
clear and accurate information to help taxpayers understand and comply
with the tax law. Notices and letters need to be easier for taxpayers
to understand to help them navigate the tax system.
In FY 2009, the IRS Commissioner established a Taxpayer Communications
Taskgroup (TACT) to study and improve the clarity, accuracy and
effectiveness of written communications to taxpayers.
The TACT consists of five workgroups each focused on a key aspect of
improving taxpayer communications:
* Collection Notices;
* Correspondence Reduction;
* E-Notices;
* Error Reduction;
* Exam Notices.
Notable TACT accomplishments in FY 2009 included:
* Reduced the number of inserts included with a balance due notice from
13 to 2, reducing paper and improving clarity and readability. This
streamlining effort will eliminate more than 16 million pieces of paper
per year and also reduce annual postage costs by over $570,000.
* Eliminated inserts in practitioner copies of notices, reducing paper
by approximately 15 million pieces per year and reducing annual postage
costs by nearly $350,000.
* Developed new prototypes for 40 notices (these notices comprise 70%
of the total volume of all notices sent out) that are clear, concise
and provide better comprehension for taxpayers.
Taxpayer Education and Outreach:
The IRS enhanced its outreach and educational services through
partnerships with the public to increase understanding and compliance
with the tax law. Free tax seminars were offered to groups of people
sharing common tax interests on a variety of topics tailored to the
members and included films, video tapes, and discussions of tax
questions.
The IRS partners with organizations such as state taxing authorities
and volunteer groups to serve taxpayer needs. Through its 6,468 VITA
and 5,692 TCE sites, the IRS provided free tax assistance to the
elderly, disabled, and limited English proficient individuals and
families. Over 82,000 volunteers located at these sites filed over 3.0
million returns. VITA grants were awarded to 111 organizations,
resulting in funding 2,700 sites across the nation preparing over
777,000 returns.
Based on last year's demand and positive feedback, the IRS held the 2nd
annual "Super Saturday" event resulting in the largest one-day outreach
service event in IRS history. Successes from Super Saturday include:
* Assisted over 11,000 taxpayers with a variety of services including
tax advice and return preparation.
* Answered over 33,000 calls and prepared over 53,000 returns for
taxpayers needing assistance.
* Promoted and achieved approximately 200 media stories on Super
Saturday.
* Used over 1,700 VITA sites across the country.
With many people facing additional financial difficulties, the IRS took
several steps to work with taxpayers who owed delinquent taxes,
especially those who have filed in the past and were facing unusual
hardships. These included:
* Postponement of Collection Actions: The IRS suspended collection
actions in certain hardship cases where taxpayers were unable to pay.
* Lien Relief for Homeowners trying to Refinance or Sell: In an effort
to raise taxpayer awareness of the availability of the discharge and
lien subordination process, IRS conducted various outreach efforts and
sought feedback from the National Society of Accountants, the American
Bar Association and the National Associations of Enrolled Agents and
Tax Professionals resulting in a 20.8% increase in lien discharge
applications and a 5.3% increase in lien subordination.
* Added Flexibility for Missed Payments: Previously compliant taxpayers
in current Installment Agreements in certain cases were allowed to skip
payments or pay a reduced monthly payment amount without automatic
suspension of the Installment Agreement.
* Prevention of Offer in Compromise (OIC) Defaults: Taxpayers who were
unable to meet the payment terms of an accepted OIC received a letter
outlining options to avoid default.
* Expedited Levy Releases: The IRS released levies in an
expedited manner for taxpayers suffering financial hardships.
* Offering Installment Agreements: The IRS offered installment
agreements at the end of an audit to taxpayers having difficulty paying
their tax liability.
The IRS continued to reach out to taxpayers eligible for the Earned
Income Tax Credit (EITC) through a vigorous outreach strategy to
increase participation that included:
* Creating EITC products and services designed to target underserved
groups such as rural taxpayers, childless workers, and limited English
proficient filers.
* Conducting a 3rd annual EITC Awareness Day to promote the EITC that
may be a critical financial lifeline to many taxpayers. Community
coalitions and IRS partners across the nation marked the day with a
series of local news conferences and news releases promoting this
refundable tax credit for low-wage taxpayers. The organizations
operated free tax preparation sites for low and moderate-income
individuals, seniors and other eligible taxpayers in every state.
* Increasing electronic filing of EITC returns by 8.2%.
In its second year, the IRS increased the number of Facilitated Self-
Assistance workstations and phones to 50 sites, allowing nearly 12,500
taxpayers to access IRS.gov at Taxpayer Assistance Centers, a 420%
increase from 2008.
Seamless Taxpayer Experience:
One of the IRS goals is to strengthen contacts with taxpayers and tax
preparers so that every interaction is positive and seamless. In FY
2009, the IRS continued efforts to solicit feedback from taxpayers and
practitioners regarding the products and services it provides. In
addition, the IRS is conducting research to determine the types of
services the taxpayers seek from various options (Internet, walk-in, or
toll-free) and their preferences among these options.
As a result of the Taxpayer Assistance Blueprint, the Seamless Taxpayer
Experience Group (STEG) was created to serve as a catalyst between the
IRS and taxpayers. Current efforts of the STEG include:
* Improving international access to IRS services by offering overseas
taxpayers with the same or comparable access to services offered to
taxpayers in the United States.
* Reducing amended return processing time to allow additional case
types to be transferred to the Submission Processing function.
* Developing a new job aid to reduce delays in processing refund claims
by reducing the number of cases erroneously referred to Examination.
* Coordinating creation of an international brochure that provides
step-by-step navigation tips for using IRS.gov, contacting the IRS, and
general tips on filing requirements for international taxpayers to all
U.S. embassies and Consulate offices.
Strategic Goal: Enforce the Law to Ensure Everyone Meets Their
Obligation to Pay Taxes:
Objectives:
* Proactively Enforce The Law In a Timely Manner While Respecting
Taxpayer Rights And Minimizing Taxpayer Burden.
* Expand Enforcement Approaches And Tools.
* Meet The Challenges Of International Tax Administration.
* Allocate Compliance Resources Using A Data-Driven Approach To Target
Existing And Emerging High-Risk Areas.
* Continue Focused Oversight Of The Tax-Exempt Sector.
* Ensure That All Tax Practitioners, Tax Preparers, And Other Third
Parties In The Tax System Adhere To Professional Standards And Follow
The Law.
Enforcement Facts:
* From FY 2003 to FY 2009, the IRS increased revenue from its
enforcement programs 30%, yielding a 4 to 1 return on investment in
2009 based on the $48.9 billion in enforcement revenue with a budget of
$11.52 billion.
* Audited over 27,000 small business flow through returns and over
13,000 large corporations.
* Increased collection case closures by 1.7%.
* Increased tax-exempt and government entity examinations by 17% and
overall enforcement contacts by 10%.
* Monitored and conducted due diligence audits on preparers that file
questionable returns to ensure compliance by preparers and to protect
taxpayers.
Enforce the Law to Ensure Everyone Meets Their Obligation to Pay Taxes:
Enforcement of the tax laws is an integral component of the IRS effort
to enhance voluntary compliance. IRS enforcement activities, such as
examination and collection, target elements of the tax gap and remained
a high priority. In FY 2009, the IRS expanded its enforcement presence
in the international field, continued to pursue high net-worth
noncompliant taxpayers, and initiated action to better leverage the tax
return preparer community.
Highlights of Enforcement Performance:
The IRS met 50% (9 of 18) examination performance measures in FY 2009.
Total enforcement revenue was $48.9 billion in FY 2009. The IRS showed
steady progress, building on its FY 2008 successes in key enforcement
programs:
* Total individual audits increased 2.6%.
* Automated underreporter contact closures increased 2.6%.
* Number of high net-worth audits increased 11.2%.
* Large corporate audits increased 2.6%, a significant achievement
given the size (more than $10 million) and complexity of these
corporate entities.
The IRS also continued to vigorously investigate egregious tax, money
laundering, and other financial crimes which adversely affect tax
administration. Performance levels for the criminal investigation and
exempt organization programs remained high in FY 2009 as the IRS:
* Completed 3,848 criminal investigations.
* Achieved a conviction rate of 87.2%.
* Maintained a Department of Justice acceptance rate of 91.7%, with a
U.S. Attorney acceptance rate of 88.7%, which compares favorably with
other federal law enforcement agencies.
* Obtained 2,105 convictions.
* Increased tax-exempt and government entities compliance contacts 10%.
In addition, the Questionable Refund Program (QRP), a nationwide
multifunctional program designed to identify fraudulent returns and to
stop payment of fraudulent refunds, continued to show positive results.
Accomplishments include:
* Identified over 414,000 potentially fraudulent returns claiming over
$2.7 billion in total refunds of which more than $2.3 billion in
fraudulent refunds were stopped.
* Initiated 418 QRP investigations and an 86.6% conviction rate, a
78.8% incarceration rate, and an 87.2% publicity rate on adjudicated
cases.
International Tax Administration:
International compliance is a key challenge as reflected in the IRS
strategic plan.
The IRS along with the Joint International Tax Shelter Information
Centre identified new focus areas to curb cross-border abusive
transactions to supplement the work being done on tax shelter
transactions. They include:
* Tax administration issues arising from the global economic
environment and financial crisis.
* Use of off-shore arrangements to avoid tax.
* Arrangements used by high net-worth taxpayers to minimize their tax
liabilities.
* Tax administration approaches and activities to improve transfer
pricing compliance.
The IRS developed an approach to provide assistance to international
taxpayers to improve voluntary compliance. Actions taken in FY 2009
include:
* Updated a "one-stop tax page on IRS.gov for the more than 7 million
non-military Americans living outside the U.S.
* Created an international Tax Gap Series on IRS.gov to educate the
public on a variety of international issues.
* Released a new form for non-resident entertainers and athletes who
plan to work in the U.S. The form provides the ability to calculate the
correct amount of withholding based upon net income at graduated rates.
Enforcement Accomplishments:
In FY 2009, the IRS placed unprecedented focus on detecting and
bringing to justice those who hide assets overseas to avoid paying tax.
Two new initiatives were implemented as alternative methods of workload
selection for offshore cases.
* Offshore Private Banking Initiative ” the largest bank in Switzerland
agreed to provide the names of 4,450 of their U.S. account holders and
to pay a $780M fine, including $380 million to the IRS. Another bank
entered into a deferred prosecution agreement to forfeit $340 million,
the largest seizure in IRS history, in connection with violations of
the International Emergency Economic Powers Act. The bank falsified
outgoing U.S. wire transfers that involved countries/persons on the
U.S. sanctions list.
- Over 7,500 people have filed voluntary disclosure" applications since
the IRS announced the partial amnesty in March. The deadline was
extended through October 15 at the request of accountants and tax
lawyers who were experiencing an influx of inquiries and needed more
time to prepare formal applications under the program.
* Offshore Merchant Account Initiative ” a summons was issued to a
large processor of merchant accounts to identify U.S. businesses that
deposit unreported business receipts from debit and credit card sales
in accounts in banks domiciled in secrecy jurisdictions.
The IRS established an Offshore Voluntary Disclosures/Penalty Framework
for taxpayers to voluntarily disclose their offshore activities. The
framework provides taxpayers the opportunity to:
* Calculate the total cost of resolving all offshore tax issues.
* Become compliant with United States tax laws.
* Make voluntary disclosures that will be used to further the IRS
understanding of how foreign accounts and foreign entities are promoted
to U.S. taxpayers as ways to avoid or evade tax.
* Provide data to be used in developing additional IRS strategies to
inhibit promoters and facilitators from soliciting new clients.
The initiatives are part of an overall IRS strategy to improve offshore
compliance. The publicity surrounding the IRS successes resulted in an
increase in the number of taxpayers with offshore accounts voluntarily
coming forward to disclose information. This strategy and the
initiatives underway also identify banks, promoters and others that
offer, facilitate and enable abusive offshore tax avoidance schemes and
other questionable financial arrangements. They bring high-wealth
individuals and on-line e-commerce merchants into tax compliance.
As part of the effort to detect and deter aggressive tax shelters, the
IRS launched a settlement initiative for both Lease In/Lease Out (LILO)
and Sale-in/Lease Out (SILO) transactions in FY 2009. These
transactions involve complex leasing agreements in which some of the
nation's largest corporations leased or purchased large assets such as
rail systems, sewer systems and other large infrastructure, mostly
overseas, and immediately leased them back to the original owners.
These arrangements allowed taxpayers to defer billions of dollars in
tax liabilities for many years. In FY 2009, corporate entities who
accepted the settlement offer had more than 80% of the total leases and
dollars in dispute. The settlements required the corporations to
concede billions of dollars in tax deferrals.
The Compliance Assurance Process (CAP) identifies and resolves tax
issues through open and transparent interaction between the IRS and
large corporations. CAP participation has grown from 17 corporations in
2005 to 102 in 2009. The CAP program benefits both the IRS and the
taxpayer by fostering compliance, reducing the time to process a
return, and improving customer and employee satisfaction while
maintaining a high level of quality. CAP involves some of the largest
U.S. corporations.
In FY 2009, the IRS developed a comprehensive set of potential
recommendations to ensure consistent standards for tax preparer
qualifications, ethics and service. The recommendations were developed
using information obtained from a large and diverse constituent
community that included those licensed by state and federal
authorities, unlicensed tax preparers, software vendors, consumer
groups and taxpayers. Over 450 taxpayers and tax professionals along
with 600 IRS employees responded to the IRS request for comments to
help better leverage the tax return preparer community with the twin
goals of increasing taxpayer compliance and ensuring uniform and high
ethical standards of conduct for tax preparers.
The IRS continues to help pension plans, exempt organizations, and
government entities comply with tax laws. In FY 2009, the IRS:
* Released the results of its nonprofit hospital study. The research
presented demographics of nonprofit hospitals and their community
benefit and executive compensation reporting and practices that can be
used by Congress and others to revise community benefit and reasonable
compensation standards.
* Created a new category of practitioner, "Enrolled Retirement Plan
Agent" (ERPA). This new category allows practitioners who have
administrative/financial information about a plan to have a limited
practice before the IRS under the safeguard of Circular 230. In
addition, ERPAS provide valuable information to the IRS with respect to
the administrative and financial issues affecting retirement plans.
Ponzi Schemes:
In FY 2009, thousands of taxpayers were victimized by dozens of
fraudulent investment schemes including "Ponzi schemes° where the
perpetrator of the fraud promises returns which turn out to be
fictitious. In FY 2009, one such scheme affected a large and diverse
pool of investors, some of whom are reported to have lost most of their
life savings. These cases raise numerous tax and pension implications
for the victims. To assist the affected taxpayers, the IRS issued
guidance designed to provide "safe-harbor° procedures for taxpayers who
sustained losses in investment arrangements that were determined to be
criminally fraudulent. The guidance:
* Provides a uniform approach to calculate the timeframe and amount of
the theft loss.
* Avoids difficult problem of proof in determining how much of the
income the taxpayer reported was fictitious.
* Alleviates the compliance burden on taxpayers and the administrative
burden on the IRS.
The First-Time Homebuyer Credit (FTHBC) Schemes:
The Housing and Economic Recovery Act of 2008 established a tax credit
for first-time homebuyers. The ARRA of 2009 increased this credit to
$8,000.
Identified as a potential high risk area for fraudulent schemes, the
IRS identified over 160 schemes involving potentially false FTHBC
claims and 115 criminal investigations initiated.
Strategic Foundations: Invest For High Performance:
Objectives:
* Make The IRS The Best Place To Work In Government.
* Build And Deploy Advanced Information Technology Systems, Processes,
And Tools To Improve IRS Efficiency And Productivity.
* Use Data And Research Across The Organization To Make Informed
Decisions And Allocate Resources.
* Ensure The Privacy And Security Of Data And Safety And Security Of
Employees.
Strategic Foundation Facts:
* Refreshed over 8,200 laptops and 12,800 desktops.
* Deployed over 26,600 aircards, 820 Blackberries, 1,500 shredders, and
550 printers to employees across the country.
* Equipped laptops with more sophisticated disk encryption software to
protect against unauthorized use of sensitive data.
* Repelled more than 35 million unauthorized access attempts, with
about 1/3 of this malicious activity originating from outside the U.S.
borders.
* Successfully delivered 243 filing season applications and planned
modernization projects.
* Allowed 3,730 employees to take courses in accounting and information
technology or pursue other IRS-related opportunities through the
Tuition Assistance Program.
Strategic Foundations: Invest For High Performance:
Business Systems Modernization (BSM):
IRS modernization efforts continue to focus on core tax administration
systems designed to provide more sophisticated tools to taxpayers and
to IRS employees. Customer Account Data Engine (CADE), Modernized e-
File (MeF), and Account Management Services (AMS) modernization
projects delivered the required changes for the filing season,
supported implementation of ARRA provisions, and provided audit trails
addressing security vulnerabilities.
FY 2009 successes include:
* Customer Account Data Engine (CADE). The IRS successfully deployed
CADE Release 4.2 in January 2009. With this release, CADE added
capabilities to process prior-year and decedent returns, remittances,
estimated tax payments, requests for extensions and surname changes. In
FY 2009, CADE processed over 40.0 million returns issued more than 34.9
million refunds using a modernized account database, and processed over
7 million payments totaling $58.6 billion. In addition, the IRS
developed a comprehensive Audit Trail Plan for CADE outlining the audit
trail requirements necessary to account for assets and processes across
the IRS.
* Modernized e-File (MeF). The IRS deployed MeF Release 5.5 that
included the redesigned Form 990 (Return of Organization Exempt from
Income Tax) in time for the filing season. MeF processed Form 1120 and
990 returns at much higher volumes than expected. The volume of Form
1120 returns increased 38% and Form 990 increased 307% from 2008.
Returns submitted through MeF have an average 7% processing error rate,
compared to 19% for transcription-based paper processing. MeF return
receipts increased to about 4.5 million.
* Account Management Services (AMS). Completed the 2009 releases of AMS
providing additional real-time address changes to CADE by the
conversion of account transcripts from paper to electronic format. AMS
processed over 2.3 million accounts since deployment and more than 2.2
million electronic transcript cases were distributed. In addition, AMS
delivered the capability to update account address data on a daily
cycle. AMS added a new component to its organization in FY 2009, the
Integrated Automation Technologies (IAT) Branch. The IAT developed
tools to support the implementation of ARRA including the First-Time
Home Buyer Credit tool which systematically researches amended returns
for specific criteria to identify unallowable or fraudulent claims.
Workforce of Tomorrow:
The IRS Commissioner established a Workforce of Tomorrow (WOT) task
force to address recruitment and retention issues so that the IRS has
the necessary leadership and workforce to address future challenges.
The IRS conducted research, developed solutions, and tested
recommendations to produce a roadmap of initiatives to address the most
significant workforce challenges.
Highlights of the recommendations by the WOT task force included:
* Streaming the hiring process.
* Revising all communications used in the hiring process.
* Streamlining leadership competencies.
* Launching a One IRS° Community Events pilot across the nation.
* Signing a Memorandum of Understanding with NTEU to pilot the
Ambassador Program pairing new hires with current employees.
* Implementing a single-sign-on initiative reducing the number of
passwords required for IRS systems.
* Establishing a new centralized IRS Recruitment Office within the
Human Capital Office.
* Developing an attrition model to project attrition probabilities
through 2020. The model estimates attrition by various organizational,
demographic and work-related factors.
* Developing consistent equipment profiles for each IRS occupation.
* Enhancing the focus on recognition and career development for
employees.
Implementation of the recommendations is underway with periodic
tracking and reporting of milestones. An Annual Workforce Summit is
planned for February 2010 to evaluate progress and continue the focus
on work-force issues.
IT Security:
The IRS collects a tremendous amount of sensitive information, and
protecting this information is vital to maintaining the public trust.
Public trust encourages voluntary compliance with the tax law and
enables the IRS to conduct business effectively.
The IRS takes the issue of Identity Theft very seriously. In FY 2009,
to preserve and enhance public confidence, the IRS advocated the
protection and proper use of identity information by completing the
following:
* Opened Identity Protection Specialized Units (IPSUs) and established
a dedicated toll-free number to provide guidance and assistance to
taxpayers affected by identity theft. These units assist taxpayers who
have experienced tax administration issues or problems as a result of
identity theft. In the first year, the IRS responded to 120,000 calls
and opened nearly 34,000 cases for further action.
* Placed markers on more than 231,300 taxpayer accounts to alert
employees the account belongs to a substantiated identity theft victim.
The IRS also provided a portfolio of identity protection services for
taxpayers, including letters to individuals triggered by the account
marker informing taxpayers that their personal information was used by
another individual to file a return or may have been compromised
through phishing scams. In FY 2009, the IRS sent nearly 79,600 letters.
* Eliminated the use of Social Security Numbers (SSNs) on more than 8
million forms, notices, and letters. This is the first large-scale
effort to eliminate and reduce the use of SSNs on taxpayer
correspondence. Over the next 2 to 5 years IRS will eliminate the use
of SSNs on more than 90 million notices and forms.
The Office of Online Fraud Detection and Prevention (OFDP) protects the
IRS and taxpayers from increasing and evolving online threats. Through
the OFDP, the IRS shut down 3,444 phishing Web sites in
FY 2009 (1,578 domestic sites and 1,866 international sites), compared
to 2,926 sites in 2008. The median shut down time was 2.35 hours for
domestic phishing sites and 6.85 hours for international. By
monitoring, identifying, and mitigating fraudulent sites and phishing
scams, OFDP helps to reduce the number of taxpayers who fall victim to
online fraud schemes.
Human Capital:
In FY 2009, the IRS focused on workforce retention and replenishment,
leadership succession planning, and competency gap assessment and
resolution.
The level of employee engagement affects the ability to meet goals,
minimize attrition, and increase productivity. The IRS conducts an
annual survey to assess the level of engagement of employees ”72% of
employees participated in FY 2009 (a 7 percentage point increase).
Overall employee satisfaction increased from 69% in FY 2007 to 74% in
FY 2009 and employee engagement showed steady improvement from a score
of 3.66 in 2007 to a score of 3.74 in 2009, on a scale of 1 to 5, with
5 being the most satisfied. The IRS uses these results to improve the
workplace.
The IRS uses its Leadership Succession Review (LSR) process to identify
the leaders of tomorrow with 80% of managers participating. Leadership
competency, proficiency, and knowledge gaps for participating managers
address individual developmental strategies using a web-based Career
Learning Plan (webCLP) linked to LSR. The webCLP is an automated
individual career learning plan used to develop a plan for growth in
the current job or to prepare for advancement and to identify employees
for developmental opportunities through acting assignments, details,
and work on task forces.
In FY 2009, the IRS piloted the Succession Planning program that was
recently recognized by The Best Practice Institute as a test practice."
As a result, the IRS program will be included in the upcoming Best
Practices in Talent Management Handbook in January 2010. Succession
planning ensures employees possess the competencies necessary to meet
future IRS needs at every level.
IRS continued the process of distributing new identification badges to
employees, as mandated by Homeland Security Presidential Directive-12
(HSPD-12). To facilitate the delivery of badges to over 5,000 employees
in remote locations, IRS established mobile credentialing circuits. A
primary hurdle in reaching remote employees was the high cost and often
unavailability of networking options to connect credentialing stations
to the Internet. IRS leveraged the use of a Common Communication
Gateway to not only provide the necessary connection, but also to phase
out costly network connections at existing credentialing station
locations.
In an effort to reduce the number of travel systems throughout the
government, GSA required agencies to use an e-Travel service. The IRS
migration to the new Gov-Trip entailed rolling it out to all IRS
travelers. In FY 2009, the IRS delivered Gov-Trip to 60,446 travelers
in all business units, successfully enrolling 100% of IRS travelers.
Enforcement Hiring:
In FY 2009, the IRS engaged in one of the most extensive enforcement
hiring efforts in years resulting in an enforcement staffing increase
of over 3,000 employees.
To ensure coordination at all levels, the IRS established a governance
structure to provide oversight for the hiring initiatives and created a
centralized office to coordinate all recruiting efforts and piloted a
consolidated approach to Revenue Agent hiring and training. For the
first time, candidates who applied for multiple jobs in different
locations were ranked and interviewed once, and competing organizations
collaborated on selections to ensure the best-skilled individual was
hired for each vacant position.
Veteran Hiring:
The IRS promotes partnering with government and state agencies in an
effort to recruit and employ qualified veterans.
* The IRS launched a six-month pilot of an Army-sponsored intern
program to develop career skills and address the unique issues of
veterans in the workplace.
* Veteran hiring increased 85% from 902 in FY 2006 to 1,669 in FY 2009.
* FY 2009 targeted recruitment efforts resulted in an increase in
veteran hires from 1 in every 17 new hires in FY 2006 to 1 in every 11
new hires in FY 2009.
OMB Circular A-123, "Management's Responsibility for Internal Control"
IRS conducted the required evaluation of the effectiveness of its
internal control over financial reporting in accordance with OMB
Circular A-123.
In FY 2009, the IRS conducted the following A-123 activities:
* Tested 19 transaction processes material to Treasury's Consolidated
Financial Statements.
- 16 administrative processes related to $12 billion in administrative
transactions.
- 3 custodial revenue processes related to $2.345 trillion in tax
revenues.
* Conducted supplemental testing of the FY 2009 transactions in the
fourth quarter to verify that controls remained effective throughout
the year.
* Reviewed controls over financial reporting, including Treasury
Information Executive Repository (TIER) reporting.
* Conducted a self-assessment of the IRS internal control environment
using GAO's Abbreviated Internal Control Evaluation Checklist.
* Reviewed IRS compliance with applicable laws and regulatory
requirements regarding financial reporting and internal control.
Based upon the results of the evaluation, the IRS provided qualified
assurance that its internal controls were operating effectively.
The qualified assurance is based on the fact that the IRS has open
material weaknesses currently being addressed in corrective action
plans. The IRS has developed compensating procedures which are tested
in the A-123 internal controls review program to produce financial
statements that are fairly stated and on which GAO has issued an
unqualified opinion in FY 2009 and 2008.
Systems Controls and Legal Compliance:
The IRS continued to enhance financial management and appropriate
controls that are an integral component of all IRS programs.
Federal Managers' Financial Integrity Act (FMFIA):
During FY 2009, the IRS complied with the internal control requirements
of FMFIA, the Office of Management and Budget (OMB) Circular A-123, and
the Reports Consolidation Act of 2000.
The systems of management control for the IRS organizations are
designed to ensure that:
* Programs achieve their intended results;
* Resources are consistent with the overall mission;
* Programs and resources are protected from waste, fraud, abuse,
mismanagement, and misappropriation of funds;
* Laws and regulations are followed;
* Controls are sufficient to minimize improper and erroneous payment;
* Performance information is reliable;
* System security is in substantial compliance with all relevant
requirements;
* Continuity of operations planning in critical areas is sufficient to
reduce risk to reasonable levels;
* Financial management standards are in compliance with Federal
financial systems standards, i.e., FMFIA Section 4 and Federal
Financial Management Improvement Act (FFMIA).
Because the IRS has open material weaknesses and the financial
management systems do not substantially comply with the FFMIA, the IRS
provides qualified assurance that the above-listed systems of
management control objectives were achieved by the IRS during FY 2009.
This assurance is provided relative to Sections 2 and 4 of FMFIA. The
FMFIA material weaknesses are:
* Improve Modernization Management and Processes;
* Computer Security;
* Financial Accounting of Revenue ” Custodial.
Federal Financial Management Improvement Act (FFMIA):
The IRS made significant progress in FY 2009 toward resolving the
Financial Reporting material weakness to bring the tax revenue
financial management systems in compliance with FFMIA. In FY 2009, the
IRS completed the Custodial Detailed Database (CDDB) that serves as the
subsidiary ledger for the Interim Revenue Accounting and Control
System. In addition, IRS developed the Redesign Revenue Accounting and
Control System (RRACS) that will be implemented in January 2010
allowing the IRS to comply with the U.S. standard general ledger and
create traceability from the summary records to the detailed records in
the subsidiary ledger in CDDB.
Federal Information Security Management Act (FISMA):
In accordance with the requirements of FISMA, the IRS continued to take
actions to establish a stronger agency-wide information security
program.
Table:
Action: Certification and Testing of Systems;
Status: 100%.
Action: Systems Accreditation;
Status: 98%.
Action: Specialized training;
Status: 99.9%.
Action: Annual Awareness Training;
Status: 99%.
Action: Contractor Systems Reviews;
Status: 100%.
Action: Annual Security Controls Testing;
Status: 100%.
Action: Annual IT Contingency Plan Testing;
Status: 100%.
Action: Privacy Impact Assessment;
Status: 100%.
Action: System of Record Notice;
Status: 100%.
[End of table]
In addition to the sustained performance from last year:
IRS received agreement with TIGTA to close the Security Training and
the Certification and Accreditation components of the IRS Computer
Security Material Weakness. The closing memorandum stated, "The actions
taken by the IRS have yielded significant progress toward implementing
effective, repeatable processes in these areas."
The Disaster Recovery Program made major enhancements to ensure the
continuity and resiliency of IRS critical business processing
systems by completing the development of disaster recovery plans for
all General Support Systems; updating all IT contingency plans;
performing over 400 tests and exercises; and performing an in-depth
assessment and gap analysis of business processes and enterprise
disaster recovery capabilities.
IRS continues to implement a risk management approach that cost-
effectively focuses resources on major systems and assets supporting
tax administration.
Lien Release Non-Compliance Issue:
As of September 30, 2009, the IRS did not consistently comply with
section 6325 of the Internal Revenue Code regarding the timely release
of federal tax liens. The IRS Financial and Management Controls
Executive Steering Committee (FMC ESC) continues to monitor the action
plan which addresses lien release issues identified by the IRS,
Government Accountability Office (GAO), and the Treasury Inspector
General for Tax Administration (TIGTA).
Reports Consolidation Act of 2000:
The IRS continues to provide assurance that its critical performance
measures are reliable. Internal Revenue Manual 1.5, "Managing
Statistics in a Balanced Measurement System," provides a detailed
template that documents each measure's definition, formula,
reliability, and reporting frequency. These controls are in place to
ensure that the data are consistently and accurately collected over
time.
Continuity of Operations (COOP):
The IRS Disaster Response Plan established a comprehensive partnership
approach and response to Presidential-declared disasters. This
partnership combines the strengths from both Governmental
Liaison/Stakeholder Liaison that helps mobilize field personnel to
assist taxpayers in areas affected by the declared disaster.
The IRS uses a combination of four integrated plans called the Business
Continuity "Suite of Plans" to prepare for, respond to, and recover
from an incident. The Suite of Plans are integrated through the use of
the Incident Command System, that allows for a consistent, efficient,
and effective response and recovery. These four plans include:
* The Occupant Emergency Plan/Shelter in Place Plan provides a set of
response procedures and actions taken during the onset of an emergency
to minimize the impact of the incident.
* The Incident Management Plan allows for management of the incident.
* The Business Resumption Plan is the business/functional unit plan
that includes the advance planning and preparations necessary to
minimize loss and ensure continuity of the critical business processes.
* The Disaster Resystems Plan is the Information Technology Plan that
includes recovery of the IT infrastructure, network, hardware, systems,
applicatios, and operating systems.
Major Management Challenges and High-Risk Areas:
The Government Accountability Office (GAO) and the Treasury Inspector
General for Tax Administration (TIGTA) identified several Management
Challenges and High-Risk Areas facing the IRS. The IRS is addressing
these issues through its existing program activities. Measures of these
program activities serve to show progress in addressing the management
challenges and high-risk areas. The following are the management and
performance challenges identified by GAO on its July 2009 High-Risk
List and by TIGTA in the October 15, 2008 memorandum titled Management
and Performance Challenges Facing the Internal Revenue Service for
Fiscal Year 2009.
* GAO High Risk Areas for IRS;
- IRS Business Systems Modernization;
- Enforcement of Tax Laws.
* TIGTA Management Challenges:
- Modernization of the Internal Revenue Service (Computerized Systems
and Business Structure) and IRS Business Systems;
- Security of the Internal Revenue Service;
- Enforcement of Tax Laws (GAO) and Tax Compliance Initiatives;
- Providing Quality Taxpayer Service Operations;
- Human Capital;
- Erroneous and Improper Payments;
- Complexity of the Tax Law;
- Taxpayer Protection and Rights;
- Processing Returns and Implementing Tax Law Changes;
- Improving Performance and Financial Data for Program and Budget
Decisions.
Limitations of Financial Statements:
The principal financial statements have been prepared to report the
results of IRS operations, pursuant to the requirements of 31 U.S.C.
3515(b). The statements were prepared from the books and records of the
IRS in accordance with generally accepted accounting principles for
Federal entities and the format prescribed by OMB. The statements are
in addition to the financial reports used to monitor and control
budgetary resources, which are prepared from the same books and
records. The statements should be read with the realization that the
IRS is a component of the U.S. Government, a sovereign entity.
Progress Made in Revenue Accounting and Cost Accounting:
In FY 2009, GAO determined that the IRS had made sufficient progress in
revenue accounting and cost accounting that it eliminated the material
weakness in internal control over financial reporting and the
significant deficiency in internal control over tax revenue and
refunds.
To eliminate the material weakness, IRS established the Custodial
Detail Database (CDDB) as the subsidiary ledger to the Interim Revenue
Accounting and Control System (IRAGS) for revenue and refunds. Through
IRACS and CDDB, IRS established traceability of 98% of all revenue
receipts, almost $2.3 trillion in FY 2009, to the detailed taxpayer
transactions. In addition, prior-year frozen credit transactions
systemically frozen from refunding or offsetting pending future action
on the taxpayer's account were loaded into CDDB. Audit plans were
developed by GAO to use CDDB to test revenue receipts and refunds
during the FY 2009 financial audit for the first time.
To eliminate the significant deficiency, IRS enhanced its financial
management structure and processes to provide key management data on
costs and enforcement tax revenue. The IRS demonstrated increased use
of cost information by publishing an IRS-wide Cost Accounting Manual,
establishing an IRS-wide cost accounting users group, and developed a
plan to standardize the use of cost based measures approved by the
Examination Enforcement Governance Council. The IRS continued to expand
its ability to calculate standardized cost data and metrics for a wide
variety of its products and services across all business units through
the development of policies and methodologies adopted throughout the
agency.
Overview of Revenue and Administrative Accounts:
The IRS FY 2009 financial statements received an unqualified audit
opinion for the tenth consecutive year.
The Balance Sheet reflects total assets of $37 billion of which $29
billion (78%) are Federal Taxes Receivable, which represents amounts
expected to be collected from past due accounts. The $1 billion
increase in total assets is primarily attributable to the increase in
Due from Treasury for refunds payable to the taxpayer. The majority of
IRS liabilities consist of amounts due to Treasury related to Federal
Taxes Receivable.
The Statement of Custodial Activity shows that IRS programs collected
$2.345 trillion in federal tax receipts.
Financing Sources:
The IRS receives the majority of its funding through annual and multi-
year appropriations, which are available for use within certain
specified statutory limits. Besides appropriations, the IRS used other
financing sources. These included net transfers from other federal
agencies, and revenue from user fees for direct services provided to
customers (for example, installment agreement fees, photocopy fees, and
letter rulings and determinations fees).
Financial Highlights:
Revenue and Refund Trend Information:
FY 2009 revenue receipts collected by IRS, $2.345 trillion, decreased
by approximately 15% from FY 2008. Federal tax revenues are collected
through six major classifications: individual income and FICA/SECA,
corporate income, excise taxes, estate and gift taxes, railroad
retirement, and federal unemployment taxes.
FY 2009 tax refund activity, $438 billion, increased by approximately
3% from FY 2008. Federal tax refunds include payments for tax,
interest, and Earned Income Tax Credit and Child Care Tax Credit in
excess of the tax liability. In FY 2009, the IRS issued payments of $46
million for Advanced Earned Income Tax Credit.
Excise Tax Trust Fund:
The Quarterly Federal Excise Tax Return, Form 720, reports taxpayer
liability for excise taxes. Taxpayers make periodic deposits in advance
of filing the return. These deposits are classified as Federal Excise
Tax. After the IRS receives and processes the returns, the IRS
certifies amounts for several trust funds. Amounts reported on the
Statement of Custodial Activity are for fiscal year collections
(October 1 through September 30). Because Form 720 reporting
requirements are completed after receipt of most of the deposits, the
certification amounts will not match the amounts collected in the
fiscal year. The table below shows revised receipts certified to the
Airport and Airway Trust Fund, Black Lung Disability Trust Fund and the
Highway Trust Fund for the eight liability quarters from December 2006
through September 2008. The Department of the Treasury prepares the
warrants and allocations to the trust funds.
Table:
Airport 8 Airway Trust Fund;
Liability Quarter Ended: December 2008 ” September 2007:
$11,531,893,000;
Liability Quarter Ended: December 2007 ” September 2008:
$11,734,723,000.
Black Lung Disability Trust Fund;
Liability Quarter Ended: December 2008 ” September 2007: $651,394,000;
Liability Quarter Ended: December 2007 ” September 2008: $644,590,000.
Highway Trust Fund;
Liability Quarter Ended: December 2008 ” September 2007:
$39,891,934,000;
Liability Quarter Ended: December 2007 ” September 2008:
$38,052,198,000.
Total
Liability Quarter Ended: December 2008 ” September 2007:
$52,075,221,000;
Liability Quarter Ended: December 2007 ” September 2008:
$50,431,511,000.
[End of table]
Analysis of Unpaid Assessments - Most Unpaid Assessments Are Not
Receivables and Are Largely Uncollectible:
The unpaid assessment balance includes amounts owed by taxpayers who
file returns without sufficient payment as well as amounts assessed
through the IRS enforcement programs. As reflected in the supplemental
information to the IRS FY 2009 Financial Statements, the unpaid
assessment balance was $308 billion as of September 30, 2009, and $171
billion (56%) of this balance consists of interest and penalties.
Furthermore, the total outstanding balance of IRS unpaid assessments is
largely uncollectible because it is composed mostly of compliance
assessments and write-offs. Under federal accounting standards, unpaid
assessments require taxpayer or court agreement to be considered
federal taxes receivable. Assessments not agreed to by taxpayers or the
courts are considered compliance assessments and are not considered
federal taxes receivable. Assessments considered to have no future
collection potential are called write-offs. The following provides
detail on unpaid assessments:
* Taxes receivable represent $128 billion (42%) of unpaid assessments
and increased $16 billion (14%) from $112 billion as of September 30,
2009. About $99 billion (77%) of this balance is estimated to be
uncollectible due primarily because of the economic situation of the
taxpayers. Except for bankruptcy situations, the IRS may continue
collection actions for 10 years after the assessment. About $29 billion
(23%) of taxes receivable is estimated to be collectible.
* Compliance assessments of $75 billion represent amounts that have not
been agreed to by either the taxpayer or a court. These assessments
result primarily from various IRS enforcement programs promoting
voluntary compliance.
* Write-off amounts of $105 billion include amounts owed by defunct
corporations with no assets and failed financial institutions. The
remaining amounts are owed by taxpayers with extreme economic and/or
financial hardships, deceased taxpayers, and taxpayers who are
insolvent due to bankruptcy.
The Integrated Financial System (IFS):
IFS is the financial management system for the administrative
activities in IRS and provides the accounting for $11.5 billion in
funding. IFS also provides timely financial statements and reports in
accordance with the federal accounting and reporting standards
including information for budgeting, analysis, and government-wide
reporting.
In addition, IFS provides the core processes of General Ledger,
Accounts Payable, Accounts Receivable, Budget Execution, Cost
Accounting, Administrative Tax and Travel Accounting, Cost Allocations,
some tax processing functionality for Health Care Tax Credit Payments
(HCTC), Budget Formulation, Labor Forecasting and Budget Execution
decision support. Detailed financial, cost accounting, property
accounting and procurement data are available for authorized users.
Custodial Detail Data Base (CDDB):
CDDB was developed by the IRS to comply with the Federal Financial
Management Improvement Act and to resolve a material weakness in
financial systems relating to accounting for duplicate Trust Fund
Recovery Penalty (TFRP) assessments and the lack of a subsidiary
ledger. Noteworthy FY 2009 accomplishments for include:
* IRS demonstrated traceability for 98% of the revenue receipts to GAO
using Trace ID for the FY 2009 financial audit and all refunds. For the
FY 2008 financial audit, IRS demonstrated the traceability for 78% of
the revenue receipts.
* Implemented Release 4 to load frozen credit transactions into CDDB.
Redesign Revenue Accounting Control System (RRACS):
RRACS will allow the IRS to comply with the U.S. standard general
ledger and create traceability from the summary records to the detailed
records in the subsidiary ledger CDDB. In FY 2009, the IRS completed
RRACS development.
Integrated Financial System (IFS) FY 2009 accomplishments include:
* Completed IFS interface with GovTrip ” implemented eGov.
* Significantly reduced user access to the mainframe by migrating
legacy system reports to the business warehouse, retired legacy
processes, and trained users on reporting capabilities.
* Implemented automated tax withholding for employee tuition
assistance, created employee invoices, and automatically posted all
payments received via pay.gov.
* Updated contingency plans, completed penetration and disaster
recovery testing.
* Exceeded the average system uptime target of 97%.
Appendix A: Organization Chart:
Department Of The Treasury: Internal Revenue Service:
Top level: Commissioner/Chief of Staff:
Associated with top level:
* Chief Counsel;
* Appeals;
* National Taxpayer Advocate;
* EEO and Diversity;
* Research, Analysis, and Statistics;
* Communications and Liaison.
Second level, reporting to Commissioner/Chief of Staff:
Deputy Commissioner, Services and Enforcement;
Associated with Deputy Commissioner, Services and Enforcement:
* Office of Professional Responsibility;
* Whistleblower Office.
Deputy Commissioner, Operations Support;
Associated with Deputy Commissioner, Operations Support:
* Office of Privacy, Information Protection and Data Security.
Third level, reporting to Deputy Commissioner, Services and
Enforcement:
* Small Business/Self-Employed;
* Large and Mid-Sized Business;
* Wage and Investment;
* Tax-Exempt and Government Entities;
* Criminal Investigation.
Third level, reporting to Deputy Commissioner, Operations Support:
* Chief Technology Office;
* Chief Financial Officer;
* Agency-Wide Shared Services;
* Chief Human Capital Officer.
[End of organization chart]
Appendix B: Performance Measurement Data:
Goal 1: Improve Service to Make Voluntary Compliance Easier:
Measure: Customer Service Representative (CSR) Level of Service;
2006: 82.0%;
2007: 82.1%;
2008: 52.8%;
2009 Target: 70.0%;
2009 Actual: 70.0%.
Measure: Customer Contacts Resolved per Staff Year;
2006: 7,414;
2007: 7,648;
2008: 12,634;
2009 Target: 10,386;
2009 Actual: 12,918.
Measure: Percent of Eligible Taxpayers Who File for EITC (CY);
2006: [A];
2007: [A];
2008: [A];
2009 Target: 75%-80%;
2009 Actual: NA.
Measure: Customer Accuracy - Tax Law Phones;
2006: 90.9%;
2007: 91.2%;
2008: 91.2%;
2009 Target: 91.0%;
2009 Actual: 92.9%.
Measure: Customer Accuracy - Customer Accounts (Phones);
2006: 93.2%;
2007: 93.4%;
2008: 93.7%;
2009 Target: 93.5%;
2009 Actual: 94.9%.
Measure: Timeliness of Critical individual Filing Season Tax Products
to the Public;
2006: 83.0%;
2007: 83.5%;
2008: 92.4%;
2009 Target: 92.0%;
2009 Actual: 96.8%.
Measure: Timeliness of Critical TE/GE and Business Tax Products to the
Public;
2006: 61.2%;
2007: 84.0%;
2008: 89.5%;
2009 Target: 89.0%;
2009 Actual: 95.2%.
Measure: Percent individual Returns Processed Electronically;
2006: 54.1%;
2007: 57.1%;
2008: 57.6%;
2009 Target: 64.0%;
2009 Actual: 65.9%.
Measure: Cost per Taxpayer Served ($) (HCTC);
2006: $13.71;
2007: $14.90;
2008: $16.94;
2009 Target: $17.00;
2009 Actual: $13.79.
Measure: Sign-Up Time (Days) - Customer Engagement (HCTC);
2006: 98.7;
2007: 93.3;
2008: 94.0;
2009 Target: 97.0;
2009 Actual: 91.3.
Measure: Percent Business Returns Processed Electronically;
2006: 16.6%;
2007: 19.1%;
2008: 19.4%;
2009 Target: 21.6%;
2009 Actual: 22.8%.
Measure: Refund Timeliness - individual (Paper);
2006: 99.3%;
2007: 98.9%;
2008: 99.1%;
2009 Target: 98.4%;
2009 Actual: 99.2%.
Measure: Taxpayer Self Assistance Rate;
2006: 46.8%;
2007: 49.5%;
2008: 66.8%;
2009 Target: 64.7%;
2009 Actual: 69.3%.
Goal 2: Enforce the Law to Ensure Everyone Meets Their Obligation to
Pay Taxes:
Measure: Examination Coverage - individual;
2006: 1.0%;
2007: 1.0%;
2008: 1.0%;
2009 Target: 1.0%;
2009 Actual: 1.0%.
Measure: Field Examination National Quality Review Score;
2006: 85.9%;
2007: 85.9%;
2008: 86.0%;
2009 Target: 87.0%;
2009 Actual: 85.1%.
Measure: Office Examination National Quality Review Score;
2006: 88.2%;
2007: 89.4%;
2008: 90.0%;
2009 Target: 90.0%;
2009 Actual: 92.1%.
Measure: Examination Quality - Industry;
2006: 85.0%;
2007: 87.0%;
2008: 88.0%;
2009 Target: 88.0%;
2009 Actual: 88.0%.
Measure: Examination Quality - Coordinated Industry;
2006: 96.0%;
2007: 96.0%;
2008: 97.0%;
2009 Target: 96.0%;
2009 Actual: 95.0%.
Measure: Examination Coverage - Business (Corps. >$10M);
2006: 7.3%;
2007: 6.8%;
2008: 6.1%;
2009 Target: 5.8%;
2009 Actual: 5.6%.
Measure: Examination Efficiency-individual (1040);
2006: 128;
2007: 137;
2008: 138;
2009 Target: 132;
2009 Actual: 138.
Measure: Automated Underreporter (AUR) Efficiency
2006: 1,832
2007: 1,956
2008: 1,982
2009 Target: 1,855
2009 Actual: 1,905
Measure: Automated Underreporter (AUR) Coverage;
2006: 2.4%;
2007: 2.5%;
2008: 2.6%;
2009 Target: 2.5%;
2009 Actual: 2.6%.
Measure: Collection Coverage-Units;
2006: 54.0%;
2007: 54.0%;
2008: 55.2%;
2009 Target: 54.4%;
2009 Actual: 54.2%.
Measure: Collection Efficiency-Units;
2006: 1,677;
2007: 1,828;
2008: 1,926;
2009 Target: 1,872;
2009 Actual: 1,845.
Measure: Field Collection Embedded Quality;
2006: 84.2%;
2007: 84.0%;
2008: 79.0%;
2009 Target: 80.0%;
2009 Actual: 80.5%.
Measure: Automated Collection System (ACS) Accuracy;
2006: 91.0%;
2007: 92.9%;
2008: 95.3%;
2009 Target: 92.0%;
2009 Actual: 94.3%.
Measure: Criminal investigations Completed;
2006: 4,157;
2007: 4,269;
2008: 4,044;
2009 Target: 3,900;
2009 Actual: 3,848.
Measure: Number of Convictions;
2006: 2,019;
2007: 2,155;
2008: 2,144;
2009 Target: 2,135;
2009 Actual: 2,105.
Measure: Conviction Rate;
2006: 91.5%;
2007: 90.2%;
2008: 92.3%;
2009 Target: 92.0%;
2009 Actual: 87.2%.
Measure: Conviction Efficiency Rate ($);
2006: $328,750;
2007: $301,788;
2008: $315,751;
2009 Target: $317,100;
2009 Actual: $327,328.
Measure: TE/GE Determination Case Closures;
2006: 108,462;
2007: 109,408;
2008: 100,050;
2009 Target: 94,000;
2009 Actual: 96,246.
Strategic Foundations: Invest for High Performance:
Measure: Percent of BSM Projects within +/- 10% Cost Variance;
2006: N/A;
2007: [B];
2008: 92.0%;
2009 Target: 90.0%;
2009 Actual: 60.0%;
Measure: Percent of BSM Projects within +/-10% Schedule Variance;
2006: N/A;
2007: [B];
2008: 92.0%;
2009 Target: 90.0%;
2009 Actual: 90.0%.
[A] The methodology for estimating the eligibility rate is being
revised.
[B] Cost and Schedule variance is based on +1-10% and was reported
separately for each project release/sub-release. In FY 2008, these
measures were changed to reflect an overall percentage of all projects
that were within the +1-10% threshold for cost and schedule variance.
[End of table]
Appendix C: Explanation of Shortfalls:
Field Examination National Quality Review Score: Actions underway to
address quality weaknesses include: the National Quality Review Staff
issued Quality Alerts to the Field to address the decline in the
Solicit Payment attribute; Income Toolkit training began in the final
quarter of FY 2009; area case quality improvement teams continue to
work to address area specific quality deficiencies; area level quality
targets will be reestablished in FY 2010, with specific emphasis on
improvement within the weakest attributes.
Exam Quality ” Coordinated Industry: Workpapers did not adequately
document audit techniques used and conclusions reached, and the
Examination reports did not adequately document the issue, fact, law,
arguments and conclusions. In addition, Administrative Procedures
Documents were missing or not signed by the Team Coordinator and/or the
Team Manager. Improvements will focus on the importance of meeting the
Auditing Standards through direct feedback to field teams, partnering
with the industries in Quality Improvement Efforts, Quality Quotes,
Quarterly Reports and outreach efforts.
Exam Coverage ” Business: Although Large Business Closures (13,582)
fell short of plan, results exceeded FY 2008 closures of 13,366. Actual
return filings were 242,037, surpassing estimates of 237,315 used to
compute the coverage percentage, causing the drop in coverage. The
increased return filings were primarily in the 1120 and 1120S
categories.
Collection Coverage ” Units: A delay in the full implementation of
Business Master File Case Creation Nonfiler Identification Process
caused a delay in processing notices. Collection organizations have
worked together throughout the year to identify and assign inventory to
the campuses to mitigate the notice disposition shortfall.
Collection Efficiency: The large number of new employees in FY 2009
were not as productive as experienced caseworkers. Notice dispositions
were also down 1.0 million (6.5%) over last year. Factors in the notice
decrease included: delays in return delinquency notice processing
earlier in the year resulted in a corresponding delay in notice
closures, and a programming change in January 2009 accelerated notice
accounts directly to revenue officers with related cases.
Criminal Investigations Completed: Legal source investigations were
13.3% above last fiscal year (1,734 vs. 1,531) and tax-related
investigations increased 14.4% (2,612 to 2,283). The increased focus on
legal and tax cases (which are more complex and have a higher cycle
time) coupled with additional time spent on reducing cases in the
pipeline resulted in a lower number of investigations completed. For FY
2010, the increase in the number of investigations initiated in FY 2009
will contribute to achievement of planned Investigations.
Number of Convictions: Convictions from legal sourced investigations,
an area of increased focus, rose 2% over FY 2008. Dismissals lowered
the conviction rates and contributed to an 11% drop in illegal tax case
convictions and a 5% drop in narcotics case convictions. Monitoring of
performance and ensuring appropriate and consistent contact with
Department of Justice and the U.S. Attorney's Office regarding
prosecutorial priorities and quality investigations is planned.
Conviction Rate: Tax-based and legal sourced cases were the focus in FY
2009. While the number of convictions has not changed much over the
last three years, the number of dismissals increased. Reasons for
dismissal include fugitive subjects, uncooperative subjects, and
unavailability of witnesses. Monitoring of performance and ensuring
appropriate and consistent contact with Department of Justice and the
U.S. Attorney's Office regarding prosecutorial priorities and quality
investigations is planned.
Conviction Efficiency Rate ($): Higher than expected reimbursable
amounts from asset forfeitures increased the overall CI financial plan
thereby attributing to the increase.
Percent of BSM Projects within +1. 10% Cost Variance: Development costs
for several Account Management Services (AMS) releases exceeded initial
estimates.
Appendix D: Performance Measures Descriptions:
Goal 1: Improve Service to Make Voluntary Compliance Easier:
Customer Service Representative (CSR) Level of Service:
The number of toll free callers that either speak to a Customer Service
Representative or receive automated informational messages divided by
the total number of attempted calls.
Customer Contacts Resolved per Staff Year:
The number of Customer Contacts resolved in relation to time expended.
Percent of Eligible Taxpayers Who File for EITC The number of taxpayers
who claim the Earned Income Tax Credit (EITC) compared to the number of
taxpayers who appear to be eligible for the EITC.
Customer Accuracy ” Tax Law Phones:
The percentage of correct tax law answers given by a live assistor on
Toll-free tax law inquiries.
Customer Accuracy ” Customer Accounts (Phones):
The percentage of correct account answers given by a live assistor on
Toll-free account inquiries.
Timeliness of Critical Individual Filing Season Tax Products to the
Public:
The percentage of critical individual filing season tax products (tax
forms, schedules, instructions, publications, tax packages, and certain
notices required by a large number of filers to prepare a complete and
accurate tax return) available to the public in a timely fashion.
Timeliness of Critical TE/GE & Business Tax Products to the Public
The percentage of critical other tax products, paper and electronic,
available to the public in a timely fashion.
Percent Individual Returns Processed Electronically:
The number of electronically filed individual tax returns divided by
the total individual returns filed.
Cost per Taxpayer Served ($) (HCTC):
The costs associated with serving the taxpayers including program kit
correspondence, registration, and program participation.
Sign-Up Time (Days) ” Customer Engagement (HCTC):
The length of time between the first Program Kit mailing and the first
payment received.
Percent Business Returns Processed Electronically:
The percentage of electronically filed business tax returns divided by
the total business tax returns filed.
Refund Timeliness ” Individual (Paper):
The percentage of refunds resulting from processing Individual Master
File paper returns issued within 40 days or less.
Taxpayer Self Assistance Rate:
The percentage of taxpayer assistance requests resolved using self-
assisted automated services.
Goal 2: Enforce the Law to Ensure Everyone Meets Their Obligation to
Pay Taxes:
Examination Coverage ” Individual (1040):
The sum of all individual 1040 returns closed by Small Business/Self
Employed (SB/SE), Wage & Investment (W&I), and Large and Mid-Sized
Business (LMSB) (Field Exam and Correspondence Exam programs) divided
by the total individual return filings for the prior calendar year.
Field Examination National Quality Review Score:
The score awarded to a reviewed field examination case by a Quality
Reviewer using the National Quality Review System quality attributes.
Office Examination National Quality Review Score:
The score awarded to a reviewed office examination case by a Quality
Reviewer using the National Quality Review System quality attributes.
Examination Quality ” Industry:
Average of the scores of Industry Cases reviewed. Case scores are based
on the percentage of elements passed within each auditing standard.
Examination Quality ” Coordinated Industry:
Average of the scores of Coordinated Industry Cases reviewed. Case
scores are based on the percentage of elements passed within each
auditing standard.
Examination Coverage ” Business (Corps. 410M):
The number of LMSB returns (C and S Corporations with assets over $10
million and all partnerships) examined and closed by LMSB during the
current fiscal year divided by the number of filings for the preceding
calendar year.
Examination Efficiency ” Individual (1040):
The sum of all individual 1040 returns closed by SB/SE, W&I, and LMSB
(Field Exam and Correspondence Examination programs) divided by the
total Full-Time Equivalent (FTE) expended in relation to those
individual returns.
Automated Underreporter (AUR) Efficiency:
The total number of SB/SE and W&I contact closures (a closure resulting
from a case where IRS made contact) divided by the total FTE, including
overtime.
Automated Underreporter (AUR) Coverage:
The percentage representing the total number of SB/SE and W&I contact
closures (a closure resulting from a case where IRS made contact)
divided by the total return filings for the prior year.
Collection Coverage ” Units:
The volume of collection work disposed compared to the volume of
collection work available.
Collection Efficiency ” Units:
The sum of all modules disposed by Automated Collection System (ACS)
(SB/SE and W&I) and by SB/SE Field Collection divided by the total
collection FTE.
Field Collection National Quality Review Score:
The score awarded to a reviewed collection case by a Quality Reviewer
using the NQRS quality attributes.
Automated Collection System (ACS) Accuracy:
The percent of taxpayers who receive the correct answer to their ACS
question.
Criminal Investigations Completed:
The total number of subject criminal investigations completed during
the fiscal year, including those that resulted in prosecution
recommendations to the Department of Justice as well as those
discontinued due to a lack of prosecution potential.
Number of Convictions:
The number of criminal convictions.
Conviction Rate:
The percent of adjudicated criminal cases that result in convictions.
Conviction Efficiency Rate ($):
The cost of Criminal Investigation's (CI) program divided by the number
of convictions.
TE/GE Determination Case Closures:
The number of cases closed in the Employee Plans or Exempt
Organizations Determination programs, regardless of type of case or
type of closing.
Strategic Foundations: Invest for High Performance:
Percent of Major BSM Projects within +/-10% Cost Variance:
The percentage of Major BSM projects that are within the +/-10%
threshold for cost. The cost variance is measured from the initial cost
estimate versus current cost estimate.
Percent of Major BSM Projects within +/-10% Schedule Variance:
The percentage of Major BSM projects that are within the +/-10%
threshold for schedule. The schedule variance is measured from the
initial schedule estimate versus current schedule estimate.
Appendix E: Major Management challenges and High-Risk Areas With Future
challenges:
Over the last several years GAO, TIGTA, and the OIG for Treasury have
identified several Management Challenges and High-Risk Areas facing the
IRS. The IRS has identified specific steps and actions to address these
issues through its existing program activities. Measures of these
program activities serve to show progress in addressing the management
challenges and high-risk areas. The following summarizes each
Management Challenge and High-Risk Issue, FY 2009 accomplishments,
actions identified for completion in FY 2010 and beyond, and future
challenges. These have been arranged in the order of priority as
determined by the TIGTA.
Modernization of the Internal Revenue Service (Computerized Systems and
Business Structure) and IRS Business Systems:
Challenge/Issue: Bring the IRS's business systems and financial systems
to a level that provides management current and reliable information to
support informed decision making. GAO, in its FY 2005 High Risk series,
has consolidated IRS Financial Management into one Business Systems
Modernization high-risk area.
Actions Taken in FY 2009 and Actions Planned or Underway: Actions Taken:
* Customer Account Data Engine (CADE). The newest CADE Release was
delivered on time adding the capabilities to process prior year and
decedent returns, remittances received with original returns, process
estimated tax payments and payments received with extension requests.
For the filing season, CADE processed over 40.0 million returns, issued
more than 34.9 million refunds, and processed over 7 million payments
totaling $58.6 billion.
* Delivered the system changes necessary to implement provisions of the
American Modernization and IRS Recovery and Reinvestment Act (ARRA)
during the filing season including changes to the First-Time Homebuyer
Credit, Net Operating Loss Carryback, and changes Business Systems
to COBRA insurance limits.
* Account Management Services (AMS). Completed the 2009 releases of AMS
providing real-time address changes to CADE, additional account
transcript processing from paper to electronic format. AMS automated
inventory and workflow capabilities like electronic transcript
processing reduce IRS cost for both paper and printing and reduce
transcript handling time for customer service representatives. In 2009
more than 2.2 million electronic transcript cases were distributed to
IRS campuses. Pilot operations for an additional AMS release were
initiated in 2009 to improve response time to taxpayer inquiries by
expanding access to tax account information.
* Modernized e-File (MeF). The 2009 MeF release included the redesigned
Form 990 (Return of Organization Exempt from Income Tax) to return
processing, on time for the filing season. The processing volumes for
Form 1120 returns increased 38% and the redesigned Form 990 increased
307% from 2008. Returns submitted through MeF reduce the processing
error rates, under MeF rates are 7% compared to 19% for paper based
processing.
* Delivered 100% of filing season applications and planned
modernization project releases on schedule and the majority within cost.
* Developed a comprehensive Audit Trail Plan for CADE outlining the
audit trail requirements necessary to account for assets and processes
across the IRS.
* Developed and implemented CADE computer security incident monitoring
procedures critical to assure the confidentiality, integrity and
availability of IRS electronic systems, services and data.
* Conducted assessment of long-term modernization plans resulting in a
solution to provide timely access to authoritative individual taxpayer
account information and enhance the IRS ability, beyond that of the
current CADE approach, to address technology security, financial
material weaknesses, and long-term architectural planning and viability.
* Completed RRACS development.
* Demonstrated traceability for 98% of the revenue receipts using CDDB
Trace ID.
* Produced the CDDB Trace ID mismatch reports for accounting
reconciliation.
Actions Planned or Underway for FY 2010 and Beyond:
* Implement requirements traceability for all corrective actions
identified in the Computer Security Material Weakness plan.
* Enhance features in the Security Management and Reporting Tool (C-
SMART) to document and track results of internal security inspections
conducted by the IRS Cybersecurity office.
* Deliver MeF Release 6.1 (Form 1040 Phase I), providing capability to
process Form 1040 (including 22 other schedules and supporting forms)
which will reach 61 percent of the e-File population. A plan will be
implemented with External Trading Partners to reduce risk and ensure
stability of the MeF system.
* Develop milestones necessary to implement CADE 2.
* Deliver production pilot for CADE Release 5 adding capabilities that
include allowing individual taxpayer refunds to be applied to the next
year's tax (Credit Elect) and refund hold capability for Criminal
Investigation.
* Use CDDB to reconcile all revenue receipts and refunds for the FY
2009 financial audit.
* Implement RRACS release 1 to incorporate USSGL
Security of the Internal Revenue Service:
Challenge/Issue: Strengthening the security infrastructure and the
applications that guard sensitive data.
Actions Taken in FY 2009 and Actions Planned or Underway: Actions Taken:
* Began implementation of the IT Asset Centralization Initiative.
Actions included:
- Completed Enterprise IT Asset Discovery document and developed
transition plans for business units owing IT assets.
- Realigned hardware and personnel.
* Held a second Computer Security Material Weakness Summit and met all
summit goals.
* Implemented audit trail capability on modernization projects, CADE,
MeF and AMS, to address security vulnerabilities.
* Completed field training for Cybersecurity staff that focused on
supporting internal self-inspection capability for computer security
oversight and compliance on repeatable business processes.
* Eliminated the use of Social Security Numbers (SSNs) on over 6.5
million Notices of Intent to Levy issued by the Automated Collection
System. This is the first large-scale effort to eliminate and reduce
the use of SSNs on taxpayer correspondence. Over the next 2 to 5 years
IRS will eliminate the use of SSNs on more than 90 million notices and
forms.
* Created a "marker" to flag accounts of identity theft victims to
indicate to an employee they are dealing with a substantiated case of
identity theft.
* Created a portfolio of identity protection services for taxpayers,
including letters to inform them of personal information used by
another individual to file a return or information that may have been
compromised through phishing scams.
* Opened assistance centers (Identity Protection Specialized Units),
and established a toll-free number dedicated to providing guidance and
help to taxpayers impacted by identity theft. Responded to 120,000
calls and opened nearly 34,000 case files for further action.
* Enhanced the ability to combat increased tax administration-related
online fraud against taxpayers by shutting down 3,444 phishing Web
sites (1,578 domestic and 1,866 international), with a median shut down
time of 2.35 hours for domestic and 6.85 hours for international sites.
Actions Planned or Underway for FY 2010 and Beyond:
* Initiate a Sign-on Pilot to improve security and reduce burden of
managing multiple passwords for systems and applications utilizing the
Homeland Security Presidential Directive-12 SmartID.
* Implement requirements traceability for all corrective actions
identified in the Computer Security Material Weakness plan.
* Enhance features in the Security Management and Reporting Tool (C-
SMART) to document and track results of internal security inspections
conducted by the IRS Cybersecurity office.
* Initiate creation of a Criminal Investigation Disaster Recovery Site
in Martinsburg, WV.
Tax Compliance Initiatives:
Challenge/Issue: Administer programs to deal with tax gap issues,
especially those resulting from corporate and high-income individual
taxpayers, as well as domestic and off-shore tax and financial criminal
activity. Address the evolving challenge of unpaid taxes and continuing
Earned Income Tax Credit (EITC) non-compliance.
Actions Taken in FY 2009 and Actions Planned or Underway:
Individuals and Businesses Actions Taken:
* Collected 48.9 billion in enforcement revenue, a 30% increase over FY
2003.
* Increased examination closures for taxpayers with income over
$200,000 by over 11% and increased examination closures with income
over $1 million by over 29%.
* Implemented a National Research Program study to address cases with
the highest compliance risk by providing an identification process for
returns filed by U.S. persons living abroad.
* Established alternative methods of workload selection for offshore
cases:
- Offshore Private Banking Initiative ” issued summons to one of the
largest banks in a Switzerland to obtain the identity of U.S. taxpayers
with offshore accounts. As a result, the bank agreed to pay a $780
million fine, of which $380 million will be paid to the IRS. The bank
also agreed to provide the names of 4,450 of their U.S. account holders.
- Entered into a deferred prosecution agreement with another bank. The
bank agreed to forfeit $340 million, the largest seizure in IRS history
for falsifying outgoing U.S. wire transfers for countries/persons on
the U.S. sanctions list.
-Offshore Merchant Account Initiative ” a summons was issued to a large
processor of merchant accounts to identify U.S. businesses that deposit
unreported business income from debit and credit card sales in accounts
located in banks domiciled in secrecy jurisdictions.
* Developed products and services to assist international taxpayers in
complying with tax laws. Actions include:
- Updated a one stop" tax page on IRS.gov for the more than 7 million
nonmilitary Americans living outside the U.S.
-Created an "International Tax Gap Series" on IRS.gov to educate the
public on a variety of international issues.
- Released new forms for non-resident entertainers and athletes who
plan to work in the U.S. The form calculates the correct amount of
withholding based upon net income.
- Opened a new Tax Attaché office in Beijing, China on schedule.
* Implemented new schedule M-3 for Form 1120F to gather information on
foreign controlled corporations.
* Enhanced Automated Underreporter (AUR) case selection and inventory
modeling utilizing historical results to reduce the number of
unnecessary notices issued to taxpayers, resulting in a 20.1% reduction
of no change cases.
* Tested EITC paid preparer education and compliance notices and
telephone contacts to determine the effect of early education and
intervention on the accuracy of returns prepared by first-time paid
preparers. Lessons learned from the first year of the test will be used
to perfect methodology for a Year 2 test.
* Timely delivered a training program for campus and functional fraud
coordinators.
* Initiated examinations against approximately 2,500 noncompliant
locally hired employees of foreign embassies who either failed to
report their wages, claimed deductions to which they were not entitled,
incorrectly established retirement plans, failed to pay self-employment
tax, or failed to file tax returns.
- Completed screening of taxpayers who did not participate in a
settlement initiative and initiated examinations on selected returns.
* Tested an AUR Soft Notice program that provided the taxpayer the
opportunity to self-correct income reporting errors.
* Completed new scoring formulas for the Discriminant Analysis System.
Returns in active workload inventory system have new scores that
reflect the level of reporting non compliance.
* Updated 16 audit technique guides that serve as reference material
for users and stakeholders.
Actions Planned or Underway for FY 2010 and Beyond:
* Use audit results and intelligence from ongoing offshore initiatives
to refine case identification and selection methods and to identify
promoters, facilitators and participants in abusive offshore
arrangements.
* Improve the way compliance risks are identified and addressed in
large, complex global businesses and high wealth individuals.
* Modify Examination case selection and modeling to include cases where
taxpayers claimed the First-Time Home Buyer Credit.
* Implement improved analytics in AUR case selection while continuing
to test soft notices as an alternative to examinations.
* Implement improved case selection models in the Automated Collection
System.
* Continue testing the effects of education, compliance notices and
telephone contacts for EITC first-time and low-risk paid preparers on
the accuracy of returns prepared.
* Continue selection and examination of locally hired employees of
foreign embassies who did not elect to participate in settlement
initiatives.
Tax-Exempt and Government Entities Actions Taken:
* Increased examinations by 17% and overall enforcement contacts by 10%.
* Expanded the use of risk modeling results to adjust filters for cases
selection and tested new models for examinations of exempt
organizations that report gaming activities on Form 990.
* Shut down 3 promoter schemes that use retirement plans as parties to
abusive transactions.
* Secured over 2,700 delinquent employment tax returns from exempt
organizations and initiated examination of 1,174 returns involving 297
exempt organizations through a Combined Annual Wage Reporting Project
which addresses employment taxes.
* Assisted the Department of Justice in developing criminal cases and
preparing prosecutions on over 60 abusive tax-exempt bond situations.
* Released the final report on IRS's nonprofit hospital study. The
report summarizes the reported community benefit and executive
compensation data across various demographics.
Actions Planned or Underway for FY 2010 and Beyond:
* Continue to assist the Department of Justice in developing criminal
cases and in preparing prosecutions on abusive tax-exempt bond
situations.
* Analyze results from governmental bond questionnaires to identify
areas of noncompliance and market trends.
* Utilize investigations to identify promoters of abusive transactions
involving retirement plans to deter the marketing of abusive promoter
schemes.
* Examine a sample of college and universities for unrelated business
taxable income and compensation.
* Continue to address emerging compliance issues, including
internationally sponsored pension plans, the movement of in-kind
charitable gifts offshore, and cross-border commerce using Indian
reservations.
Providing Quality Taxpayer Service Operations:
Challenge/Issue: Providing top quality service to every taxpayer in
every transaction is an integral part of the IRS strategic and
modernization plans.
Actions Taken in FY 2009 and Actions Planned or Underway: Actions Taken:
* Continued implementation of Taxpayer Assistance Blueprint (TAB)
service improvements including creation of the Seamless Taxpayer
Experience Group to identify and coordinate enterprise-wide
improvements from the taxpayer's perspective. Initiatives included:
- Implemented the first release of the Customer Online Decision Support
(COLDS) tool to provide taxpayers with tax law information in an easily
navigable format.
- Updated web applications with new web-based calculators and wizards.
- Implemented single issue toll-free product lines.
- Expanded service locations for disabled taxpayers.
- Created 332 'Talking Tax Forms" for visually impaired taxpayers.
- Launched Spanish versions of the Free File Program, an interactive
Spanish application for "How much was my Stimulus Payment?", and a
Spanish Tax Practitioner Tool Kit;
* Developed a web-based application and information on claiming the
Recovery Rebate Credit for taxpayers who did not receive an Economic
Stimulus Payment or received less than the maximum amount.
* Based on last year's demand and positive feedback, the IRS held a 2nd
annual "Super Saturday" event resulting in the largest one-day outreach
service event in IRS history. Successes from Super Saturday include:
- Assisted over 11,000 taxpayers with a variety of services including
tax advice and return preparation.
- Answered over 33,000 calls and prepared over 53,000 returns for
taxpayers needing assistance.
- Promoted and achieved approximately 200 media stories on Super
Saturday.
- Used over 1,700 VITA sites across the country.
* Provided extensive media attention and expanded electronic outreach
activities to make taxpayers aware of new credits, deductions and
exclusions for which they qualify.
- Three days after the American Recovery and Reinvestment Act became
law, developed new withholding tables in support of the Make Work Pay
Credit.
- In March, announced that businesses with deductions exceeding their
income in 2008 can use a new net operating loss tax provision to get an
expedited refund of taxes paid in prior years.
- Shifted resources to handle the expected growth of bankruptcies and
business workouts.
- For the first time, taxpayers were informed of available credits
through YouTube videos and iTunes podcasts.
* Expanded partnerships with nonprofit and community organizations,
opening more than 12,100 free tax preparation sites nationwide.
Volunteers at these sites prepared over 3.0 million returns for low-
income and elderly taxpayers.
* Expanded taxpayers served at IRS Taxpayer Assistance Centers to 6.2
million.
* Identified additional locations to expand and improve geographic
coverage for walk-in services (e.g. Volunteer Income Tax Assistance
(VITA) sites).
* Updated web applications, including Economic Stimulus Payment
calculators and "Where's My Stimulus Payment?", to provide timely
information to taxpayers.
Actions Planned or Underway for FY 2010 and Beyond:
* Provide topical information, alternative resources, and expedited
routing options through the toll-free telephone system.
* Provide greater access to available services on non-workdays through
events such as "Super Saturday" and other special service days like
EITC awareness days.
* Improve the taxpayer's experience by implementing new quality
initiatives at Taxpayers Assistance Centers and volunteer return
preparation sites using sampling reviews of selected returns to
determine the accuracy of returns prepared.
* Gather feedback from professional organizations that represent
external stakeholders (i.e. Accountants, Reporting Agents, etc.) to
simplify forms and the tax filing process.
Human Capital:
Challenge/Issue: The IRS ability to meet expectations in personnel
management area, such as recruiting, training, and retaining
employees.
Actions Taken in FY 2009 and Actions Planned or Underway: Actions Taken:
* Increased Enforcement hiring goals 148% over FY 2008, with Mission
Critical Occupation positions making up 45% of new hires.
* Increased veteran hiring by 41%, making up 9% of all new hires, and
3% of disabled hires. Targeted recruitment efforts have resulted in an
increase in veteran hires from 1 in every 17 new hires in FY 2006 to 1
in every 11 new hires in FY 2009.
* Continued efforts to quickly replace key leaders lost to retirement
by expanding the Leadership Succession Review (LSR) process.
- LSR which identifies leadership competency proficiency and gaps to
help address individual and organization developmental strategies has
been recognized by The Best Practice Institute as a business "best
practice".
* Implemented "Workforce of Tomorrow" provisions, including:
- Streamlined hiring process to reduce applicant burden.
- Revised new employee on-boarding process from a one day orientation
to a 12-month experience to help them feel welcomed as members of the
IRS community.
- Developed enhanced career progression strategies, including
development of "fast track" training program for identified high
potential candidates.
- includes a redesign of the IRS careers website.
- Established an improved employee recognition program to attract and
retain the best employees.
Actions Planned or Underway for FY 2010 and Beyond:
* Develop an overall strategy for improving coaching and mentoring
skills at all leadership levels, including implementation of an
internal coaching certification program and core workshops for all
leaders.
* Continue improvements to Leadership Succession Review utilizing new
software to enhance reporting capabilities.
* Implement streamlined hiring enhancements using software that
incorporates the full capabilities of automated ranking and rating.
* Implement the Accelerated Leadership Program pilot to test a "fast
track" training program for identified high potential candidates.
Erroneous and Improper Payments:
Challenge/Issue: Reduce improper payments that include base compliance
activities and redesign efforts.
Actions Taken in FY 2009 and Actions Planned or Underway:
Actions Taken:
* Protected $3.2 billion in revenue through EITC enforcement efforts,
which includes the examination of over 500,000 returns and 25,000
amended returns claiming EITC, 314,000 document matching reviews, and
300,000 math error process corrections.
* Identified more than 123,000 fraudulent returns claiming over $361
million in refunds, stopped over $90 million in fraudulent claims using
the Electronic Fraud Detection System, with an average refund of $2,867.
* Refined marketing for EITC Awareness Day based on data and
internal/external feedback to increase overall participation, targeting
the underserved and a new population segment emerging from the economic
downturn.
- Public Service Announcement campaigns were provided in English and
Spanish, utilizing IV, radio, and print ads with 57,772
airings/insertions.
- IRS partners increased free EITC return preparation.
- EITC dollars distributed, increased by almost 21% over the same
period in 2008.
* Completed activities for year four of the EITC Return Preparer Study
- Analyzed short-term outcomes, including penalties and accuracy of
returns and outcomes from due diligence visits, education/compliance
notices, and phone calls to first-time EITC preparers.
- Improved EITC paid preparer due diligence visit by clarifying
procedures and completing visits earlier, resulting in a 5% increase in
due diligence visits over 2008 and proposed penalties of $462,500.
* Continued to identify and investigate high-impact EITC fraud and tax
scheme promoters by transitioning resources into Fraud Detection Center
Workload Transition (FDC WLT) project.
* Identified research-based approaches to improve EITC participation
and minimize taxpayer errors.
- Collaborated with two tax software associations to implement a joint
IRS/EITC Software Developer Working Group.
- Developed an IRS.gov EITC Preparer Toolkit to help tax preparers
assist taxpayers.
- Expanded outreach to ensure preparers were aware of their due
diligence requirements on newly issued regulations.
* Presented two seminars for EITC preparers at the six Nationwide Tax
Forums to educate preparers on how to avoid common EITC errors and meet
due diligence requirements.
* Completed the second phase of the EITC Longitudinal Study. Analysis
of results will be used to identify trends in tax preparer behavior and
to design solutions to enhance preparer outreach and compliance.
Actions Planned or Underway for FY 2010 and Beyond:
* Hold a fourth annual EITC Awareness Day, targeting potentially
eligible taxpayers and expanding partnerships and media coverage with
an emphasis on markets where data suggests underserved communities
reside.
* Use Census and market research data, recent EITC legislation, and
economic factors to develop the 2009 EITC marketing/awareness campaign.
- Expand campaign to include more social media and other creative
platforms to reach the underserved, increase overall participation and
improve compliance.
* Increase the accuracy of EITC returns by refining EITC paid preparer
treatment activities including due diligence audits, visits by revenue
and criminal investigation agents, streamlined injunctions, and
streamlining notice/phone contact treatments.
* Implement an on-line training module for preparers that cover
requirements and standards.
* Continue partnerships with key tax software associations to identify
program enhancements to help reduce EITC errors and assist preparers in
meeting requirements.
* Improve data matching to ensure IRS has a solid base of cases from
which to identify schemes for development.
* Utilize AUR data to identify outreach and education opportunities for
identified patterns of noncompliance that may be replicated in EITC
returns.
Complexity of the Tax Law:
Challenge/Issue: Simplifying the tax process within current laws while
at the same time modernize IRS systems and processes to reduce tax
complexity for individual and business taxpayers.
Actions Taken in FY 2009 and Actions Planned or Underway:
Actions Taken:
* Developed and implemented multi-faceted treatments that address
underlying behaviors that contribute to non-compliance, including:
- Used a wide range of strategies, outreach products and communication
vehicles such as Webinars, tax practitioner institutes, and National
Tax Forums to deliver outreach and education to the tax professional
community, industry partners, and small business and self-employed
taxpayers.
- Employed the Issue Management Resolution System (IMRS) to identify
concerns raised by external partners; Developed presentations for
liaison events based on IMRS topics.
- Requested feedback from stakeholders on existing outreach and
educational programs to identify best practices and enhancements.
* Expanded IRS.gov outreach products to include online versions of the
Small Business Resource Guide, Tax Calendar, and the small business Tax
Center.
* Implemented an online QM database to facilitate issue resolution on
emerging issues like ARRA for external stakeholders.
* Expanded access to outreach and education materials along with
subscription services for IRS newsletters, e-news for Tax Professionals
and Small Businesses, with approximately 300,000 online readers.
* Created additional Employee Plans Fix-It Guides for the Simplified
Employee Pension and the Salary Reduction Simplified Employee Pension
Plans to help employers find, fix, and avoid common plan mistakes.
* Streamlined the determination approval process for certain public
charities by eliminating the advance ruling process for a section
501(c)(3) organization.
* Published new IRM provisions for Tax-Exempt Bonds' Voluntary Closing
Agreements to include tax-credit bonds and to streamline the program
with standardized closing agreement settlement terms.
* Developed processes for allocating $2.4 billion of ARRA provided
Clean Renewable Energy Bonds (CREBS) and $2 billion of Tribal Economic
Development Bonds.
* Implemented the Build America Bond (BAB) and other ARRA tax credit
bond provisions, including:
- Coordinating development of a new direct payment processing system.
- Development of a new return, Form 8038-CP, and instructions.
- Implementing new compliance programs related to BABs and other new
forms of tax credit bonds.
- Conducting ARRA outreach presentations to groups that included
underserved territories and tribes.
- Development of seven notices and educational documents related to the
new provisions.
Actions Planned or Underway for FY 2010 and Beyond:
* Finalize the allocations of $2.4 billion of Clean Renewable Energy
Bonds (CREBS) and $2 billion of Tribal Economic Development Bonds.
* Release forms for Build America Bonds and other tax credit bonds.
* Publish new IRM provisions to clarify the processes for handling
rebate refund cases for Tax-Exempt Bonds.
* Streamline examination procedures for both walk-in closing agreements
and closing agreements for exempt organizations.
* Expand Spanish language Small Business Tax Workshops to improve
compliance.
* Continue to provide customers with access to tax law information on
IRS.gov in an easily understandable format.
Taxpayer Protection and Rights:
Challenge/Issue: The IRS has made significant progress in complying
with the Internal Revenue Service Restructuring and Reform Act of 1998,
and most provisions pertaining to taxpayer protection and rights have
been implemented. Significant management attention is still required to
ensure that remaining issues have been addressed.
Actions Taken in FY 2009 and Actions Planned or Underway:
Actions Taken:
* Completed an oversight review/approval process for preparer penalties
to ensure uniform and consistent application of penalties.
- Established a single point of contact on return preparer penalties
for all field personnel to ensure uniform and consistent application of
penalties.
- Require approval is for all return preparer penalty cases.
- Coordinate closely with business units to ensure uniform and
consistent application.
* Continued efforts to remove or redact Social Security Numbers from
outgoing correspondence.
* Completed an analysis of excluding all Social Security Administration
recipients below certain income levels from the Federal Payment Levy
Program. Results indicate excluding all Social Security Administration
(SSA) recipients is not the correct approach. Initiated development of
models with TAS to determine SSA recipients to exclude.
Actions Planned or Underway for FY 2010 and Beyond:
* Implement a low-income filter that will exclude taxpayers that are
more likely to experience a hardship if included in the Federal Payment
Levy Program.
* Identify parameters for contractors regarding the protection of
taxpayer Personally Identifiable Information (PII) for inclusion in all
publishing contracts.
* Complete and implement models to determine which SSA recipients to
exclude from the Federal Payment Levy Program by FY 2011.
* Develop comprehensive set of return preparer recommendations and
metrics to ensure uniform and high ethical standards of conduct for
preparers.
Processing Returns and Implementing Tax Law Changes During the Tax
Filing Season:
Challenge/Issue: The filing season remains a critical IRS program that
impacts every American taxpayer. Many programs, activities and
resources have to be planned and managed effectively for the filing
season to be successful.
Actions Taken in FY 2009 and Actions Planned or Underway:
Actions Taken:
* Delivered a successful 2009 filing season, mitigating the impact of
residual Economic Stimulus payment issues, deduction of real estate
taxes for taxpayers who do not itemize deductions, and two versions of
the First-Time Homebuyer Tax Credit (FTHBC) for homes purchased in 2008
and in 2009 resulting from the Emergency Economic Stabilization Act of
2008 and the 2009 ARRA.
- Processed 144.4 million individual returns and issued 111.4 million
refunds totaling $339.6 billion.
- Answered roughly 39 million calls from taxpayers to obtain
information on new credits available to them.
- Processed 1.8 million automated telephone calls through the Toll-free
Rebate Hotline for taxpayers to research the amount of their 2008
Economic Stimulus Payment for use in completing their returns.
- Provided two interactive online web application tools to assist
taxpayers in calculating and claiming their recovery rebate credit -
the Recovery Rebate Calculator and "How Much Was My 2008 Stimulus
Payment?". These online applications served 56.4 million taxpayers.
* Reduced the size and age of adjustment inventory levels in order to
attain a manageable inventory going into the filing season by balancing
resources between phones and paper, training additional Customer
Service Representatives to work amended returns, and moving inventory
where appropriate to take advantage of trained resources. Best
practices techniques were also shared between sites via weekly
conference calls.
* Identified erroneous and fraudulent FTHBC claims through new
programming and pre-refund filters that reject electronically filed
returns claiming the credit when the following conditions were met:
- Claims in excess of the maximum allowable credit.
- Claims in excess of allowable amounts for those taxpayers with
adjusted gross income exceeding income limitations.
Actions Planned or Underway for FY 2010 and Beyond:
* Continue to identify erroneous and fraudulent claims and schemes on
returns claiming the FTHBC and other ARRA credits where appropriate.
* Provide an automated application that allows taxpayers to obtain
their PIN for use in electronically submitting their TY 2009 returns.
* Complete assessment of risk for all ARRA provisions and ensure risk
mitigation actions are identified and completed.
* Ensure that tax forms and publications all reflect changes resulting
from ARRA legislative provisions.
* Deliver a seasonal workforce to ensure stabilization of service
levels at all Taxpayer Assistance Centers to respond to the taxpayers'
changing needs.
Improving Performance and Financial Information for Program and Budget
Decisions:
Challenge/Issue: The absence of accurate and complete management
information hinders the IRS's ability to produce timely, accurate and
useful information needed for day-to-day decisions.
Actions Taken in FY 2009 and Actions Planned or Underway:
Actions Taken:
* Converted IRS Cost Policy into a published Managerial Cost Accounting
IRM that provides:
- Cost versus budget guidance.
- Allocation approval guidance.
- Updated roles and responsibilities.
* Established standardized methodology for the development of cost
based measures for use in making ongoing performance/program activity
decisions.
* Established an IRS Service-wide Cost user group and held quarterly
meetings to provide guidance and share information.
* Used managerial cost accounting system to complete cost-benefit
analyses and cost estimation with Collection, and Examination functions
including Correspondence Exam, and AUR.
Actions Planned or Underway for FY 2010 and Beyond:
* Continue use of the managerial cost accounting system to conduct cost
benefit analyses that provides timely, accurate, and useful data for
decision making by business units.
[End of section]
Financial Statements:
Principal Financial Statements:
The principal financial statements have been prepared to report the
financial position and results of operations of the Internal Revenue
Service (IRS), pursuant to the requirements of the Chief Financial
Officers Act of 1990 (P.L. 101-576), the Government Management Reform
Act of 1994 and the Office of Management and Budget (OMB) Circular No.
A-136, Financial Reporting Requirements, as amended. The responsibility
for the integrity of the financial information included in these
statements rests with the management of the IRS. The audit of the IRS
principal financial statements was performed by the Government
Accountability Office (GAO).
The IRS principal financial statements for fiscal years 2009 and 2008
are as follows:
* The Balance Sheet presents the assets, liabilities and net position.
* The Statement of Net Cost presents the net cost of operations by
program. It includes the gross costs less any exchange revenue earned
from activities.
* The Statement of Changes in Net Position presents the change in net
position resulting from the net cost of operations, budgetary financing
sources other than exchange revenues, and other financing sources.
* The Statement of Budgetary Resources presents the budgetary
resources; the status of those resources; the change in obligated
balances during the year; and the outlays. Additional detail by major
budget accounts is available in the Required Supplementary Information
section.
* The Statement of Custodial Activity presents the sources and
disposition of non-exchange federal tax revenues collected.
Internal Revenue Service:
Balance Sheet:
As of September 30, 2009 and 2008:
(In Millions)
Assets:
Intragovernmental:
Fund Balance with Treasury (Note 2):
2009: $2,463;
2008: $2,072.
Due from Treasury (Note 6):
2009: $4,031;
2008: $3,064.
Other Assets (Note 3)
2009: $147;
2008: $186.
Total Intragovernmental:
2009: $6,641;
2008: $5,322.
Cash and Other Monetary Assets (Notes 4, 6):
2009: $63;
2008: $133.
Federal Taxes Receivable, Net (Notes 5, 6):
2009: $29,000;
2008: $29,000.
Property and Equipment, Net (Note 7):
2009: $1,094;
2008: $1,159.
Other Assets (Note 3):
2009: $12;
2008: $17.
Total Assets:
2009: $36,810;
2008: $35,631.
Liabilities:
Intragovernmental:
Due to Treasury (Note 5):
2009: $29,000;
2008: $29,000.
Other Liabilities (Note 8):
2009: $208;
2008: $197.
Total Intragovernmental:
2009: $29,208;
2008: $29,197.
Federal Tax Refunds Payable:
2009: $4,031;
2008: $3,064.
Other Liabilities (Notes 8, 9):
2009: $1,659;
2008: $1,685.
Total Liabilities:
2009: $34,898;
2008: $33,946.
Net Position:
Unexpended Appropriations:
2009: $1,675;
2008: $1,523.
Cumulative Results of Operations:
2009: $237;
2008: $162.
Total Net Position:
2009: $1,912;
2008: $1,685.
Total Liabilities and Net Position:
2009: $36,810;
2008: $35,631.
The accompanying notes are an integral part of these statements.
Internal Revenue Service:
Statement of Net Cost:
For the Years Ended September 30, 2009 and 2008:
(In Millions)
Program: Taxpayer Assistance and Education;
Gross Cost:
2009: $556;
2008: $623;
Earned Revenue:
2009: ($5);
2008: ($6).
Net Cost of Program:
2009: $551;
2008: $617.
Program: Filing and Account Services:
Gross Cost:
2009: $3,950;
2008: $3,602.
Earned Revenue:
2009: ($68);
2008: ($61).
Net Cost of Program:
2009: $3,882;
2008: $3,541.
Program: Compliance:
Gross Cost;
2009: $8,175;
2008: $8,136.
Earned Revenue:
2009: ($295);
2008: ($285).
Net Cost of Program:
2009: $7,880;
2008: $7,851;
Program: Administration of Tax Credit Programs;
Gross Cost:
2009: $190;
2008: $184.
Earned Revenue:
2009: ($295);
2008: ($285).
Net Cost of Program:
2009: $190;
2008: $184.
Net Cost of Operations (Note 11):
2009: $12,503;
2008: $12,193.
The accompanying notes are an integral part of these statements.
Internal Revenue Service:
Statement of Changes in Net Position:
For the Years Ended September 30, 2009 and 2008:
(In Millions)
Beginning Balances
2009: Cumulative Results of Operations: $162;
2009: Unexpended Appropriations: $1,523;
2008: Cumulative Results of Operations: $284;
2008: Unexpended Appropriations: $1,482.
Budgetary Financing Sources:
Appropriations Received:
2009: Unexpended Appropriations: $11,603;
2008: Unexpended Appropriations: $11,095.
Appropriations Transferred In/Out:
2009: Unexpended Appropriations: $130;
2008: Unexpended Appropriations: $18.
Other Adjustments:
2009: Unexpended Appropriations: ($112);
2008: Unexpended Appropriations: ($68);
Appropriations Used:
2009: Cumulative Results of Operations: $11,469;
2009: Unexpended Appropriations: ($11,469);
2008: Cumulative Results of Operations: $11,004;
2008: Unexpended Appropriations: $(11,004).
Transfers In Without Reimbursement - Earmarked Funds:
2009: Cumulative Results of Operations: $10;
2008: Cumulative Results of Operations: $13.
Other Financing Sources:
Imputed Financing:
2009: Cumulative Results of Operations: $1,123;
2008: Cumulative Results of Operations: $1,067.
Transfers In/Out Without Reimbursement:
2009: Cumulative Results of Operations: $21;
2008: Cumulative Results of Operations: $30.
Transfers to General Fund:
2009: Cumulative Results of Operations: ($45);
2008: Cumulative Results of Operations: ($43).
Total Financing Sources:
2009: Cumulative Results of Operations: $12,578;
2009: Unexpended Appropriations: $152;
2008: Cumulative Results of Operations: $12,071;
2008: Unexpended Appropriations: $41.
Net Cost of Operations:
2009: Cumulative Results of Operations: ($12,503);
2008: Cumulative Results of Operations: ($12,193).
Net Change:
2009: Cumulative Results of Operations: $75;
2009: Unexpended Appropriations: 152;
2008: Cumulative Results of Operations: ($122);
2008: Unexpended Appropriations: $41.
Ending Balances:
2009: Cumulative Results of Operations: $237;
2009: Unexpended Appropriations: 1,675;
2008: Cumulative Results of Operations: $162;
2008: Unexpended Appropriations: $1,523.
The accompanying notes are an integral part of these statements.
Internal Revenue Service:
Statement of Budgetary Resources:
For the Years Ended September 30, 2009 and 2008:
(In Millions)
Budgetary Resources:
Unobligated Balance, Brought Forward, October 1:
2009: $690;
2008: $664.
Recoveries of Prior Year Unpaid Obligations:
2009: $94;
2008: $106.
Budget Authority:
Appropriations:
2009: $11,851;
2008: $11,296.
Spending Authority from Offsetting Collections:
2009: $130;
2008: $158.
Nonexpenditure Transfers, Net:
2009: $130;
2008: $18.
Permanently Not Available:
2009: ($112);
2008: ($68).
Total Budgetary Resources:
2009: $12,783;
2008: $12,174.
Status of Budgetary Resources:
Obligations Incurred:
2009: $11,896;
2008: $11,484.
Unobligated Balance ” Available (Note 2):
2009: $384;
2008: $224.
Unobligated Balance ” Not Available (Note 2):
2009: $503;
2008: $466.
Total Status of Budgetary Resources:
2009: $12,783;
2008: $12,174.
Change in Obligated Balance:
Obligated Balance, Net, Brought Forward, October 1:
2009: $1,394;
2008: $1,427.
Obligations Incurred:
2009: $11,896;
2008: $11,484.
Gross Outlays:
2009: ($11,624);
2008: ($11,388).
Recoveries of Prior Year Unpaid Obligations, Actual:
2009: ($94);
2008: ($106).
Change in Uncollected Customer Payments from Federal Sources:
2009: $15;
2008: ($23).
Obligated Balance, Net, End of Period:
2009: $1,587;
2008: $1,394.
Net Outlays:
Gross Outlays:
2009: $11,624;
2008: $11,388.
Offsetting Collections:
2009: ($144);
2008: ($136).
Distributed Offsetting Receipts:
2009: ($233);
2008: ($201).
Net Outlays:
2009: $11,247;
2008: $11,051.
The accompanying notes are an integral part of these statements.
Internal Revenue Service:
Statement of Custodial Activity:
For the Years Ended September 30, 2009 and 2008:
(In Billions)
Revenue Activity:
Collections of Federal Tax Revenue (Note 13):
Individual Income, FICA/SECA, and Other:
2009: $2,036;
2008: $2,295.
Corporate Income:
2009: $225;
2008: $354.
Excise:
2009: $47;
2008: $52.
Estate and Gift:
2009: $25;
2008: $30.
Railroad Retirement:
2009: $5;
2008: $5.
Federal Unemployment:
2009: $7;
2008: $7.
Total Collections of Federal Tax Revenue:
2009: $2,345;
2008: $2,743.
Increase in Federal Taxes Receivable, Net:
2009: [Empty];
2008: $3.
Total Federal Tax Revenue:
2009: $2,345;
2008: $2,746.
Distribution of Federal Tax Revenue to Treasury:
2009: $2,345;
2008: $2,743.
Increase in Amount Due to Treasury:
2009: [Empty];
2008: $3.
Total Disposition of Federal Tax Revenue:
2009: $2,345;
2008: $2,746.
Net Federal Revenue Activity:
2009: [Empty];
2008: [Empty].
Federal Tax Refund Activity:
Total Refunds of Federal Taxes (Note 14):
2009: $438;
2008: $426.
Appropriations Used for Refund of Federal Taxes:
2009: ($438);
2008: ($426).
Net Federal Tax Refund Activity:
2009: [Empty];
2008: [Empty].
The accompanying notes are an integral part of these statement.
Internal Revenue Service:
Notes to the Financial Statements:
For the Years Ended September 30, 2009 and 2008:
Note 1. Summary of Significant Accounting Policies:
A. Reporting Entity:
The Internal Revenue Service (IRS) is a bureau of the U.S. Department
of the Treasury (Treasury). The IRS originated in 1862, when Congress
established the Office of the Commissioner of the Internal Revenue. In
1952, the Bureau was reorganized by Congress and became the Internal
Revenue Service in 1953.
The mission of the IRS is to provide America's taxpayers with top-
quality service by helping them understand and meet their tax
responsibilities and by applying the tax law with integrity and
fairness to all.
The organizational structure of the IRS consists of organizations and
major programs which administer the tax laws and collect 96 percent of
the revenues funding the Federal government.
Organizations:
* Operating Divisions.
* Functional Divisions.
* Support Divisions.
There are four operating divisions. Wage and Investment (W&I) provides
customer support, submission processing and compliance activities with
respect to individuals with wage and investment income. Small Business
and Self-Employed (SBSE) administers compliance activities with respect
to small businesses, self-employed individuals and others with income
from sources other than wages. Tax-Exempt and Government Entities
(TEGE) oversees employee plans, tax exempt organizations, and
government entities in complying with tax laws and regulations. Large
and Mid-Size Business (LMSB) serves corporations, subchapter S
corporations, and partnerships with assets greater than
$10 million on complex issues involving tax law and accounting
principles.
The five functional divisions are Appeals, Criminal Investigation,
Communications and Liaison, Taxpayer Advocate Service and the IRS Chief
Counsel. These divisions provide enforcement services supporting both
internal and external operations. They are independent of the operating
divisions and other units of the IRS. National Taxpayer Advocate
Service reports directly to Congress and the IRS Chief Counsel reports
to the Secretary of the Treasury.
The seven support divisions are Modernization and Information
Technology Services, Agency Wide Shared Services, Stewardship, Wage &
Investment Stewardship, Executive Leadership and Direction, Human
Capital Office and Chief Financial Officer. These divisions provide
shared services support to all the IRS organizations.
Major Programs:
* Compliance;
* Taxpayer Assistance and Education;
* Administration of Tax Credit Programs;
* Filing and Account Services.
The major programs are discussed in Note 1. J., Program Costs.
The American Recovery and Reinvestment Act of 2009 (ARRA) was signed
into law on February 17, 2009. The IRS has significant responsibilities
related to the ARRA for the administration of tax relief programs,
additional tax credits and incentives.
B. Basis of Accounting and Presentation:
The financial statements have been prepared from the accounting records
of the IRS in conformity with accounting principles generally accepted
in the United States and in accordance with the Office of Management
and Budget (OMB) Circular No. A-136, Financial Reporting Requirements,
as amended. Accounting principles generally accepted for Federal
entities are the standards prescribed by the Federal Accounting
Standards Advisory Board (FASAB), which is the official body for
setting accounting standards of the Federal government.
These comparative financial statements and related notes consist of the
Balance Sheet, the Statement of Net Cost, the Statement of Changes in
Net Position, the Statement of Budgetary Resources, and the Statement
of Custodial Activity.
The accounting structure of Federal agencies is designed to reflect
both accrual and budgetary accounting transactions. Under the accrual
method of accounting, revenues are recognized when earned and expenses
are recognized when incurred, without regard to receipt or payment of
cash. Budgetary accounting facilitates compliance with legal
constraints and controls over the use of Federal funds. The Statement
of Custodial Activity is presented on the modified cash basis of
accounting. Cash collections and disbursements to Treasury are reported
on a cash basis and the change in Federal tax receivables and refunds
payable are reported on an accrual basis.
Certain assets, liabilities, earned revenues and costs have been
classified as intragovernmental throughout the financial statements and
notes. Intragovernmental is defined as exchange transactions made
between two reporting entities within the Federal government.
C. Fund Balance with Treasury:
The fund balance with Treasury is the aggregate of funds in the
accounts of the IRS, primarily appropriated funds, from which the IRS
is authorized to make expenditures and pay liabilities.
The status of fund balance with Treasury represents amounts obligated
and unobligated. The obligated balances not yet disbursed include the
amount of funds against which budgetary obligations have been incurred,
but disbursements have not been made. Unobligated balances, available
represent amounts in unexpired appropriations as of the end of the
current fiscal year. Unobligated balances become available when
apportioned by the OMB. Unobligated balances, unavailable represent
amounts in expired appropriations and amounts not apportioned for
obligation as of the end of the current fiscal year.
D. Other Assets:
Accounts receivable consist of amounts due to the IRS from the public
and Federal agencies. Accounts receivable are recorded and reimbursable
revenues are recognized as the services are performed and costs are
incurred. The allowance for uncollectible accounts is based on an
annual review of groups of accounts by age for accounts receivable
balances older than one year.
Advances to government agencies primarily represent funds paid to the
Treasury Working Capital Fund (WCF). Centralized services funded
through the WCF consist primarily of telecommunications services,
payroll processing, and depreciation of property and equipment owned by
the WCF. Advances to the public are cash outlays for criminal
investigations and employee travel.
Forfeited property held for sale is acquired as a result of forfeiture
proceedings or foreclosure sales to satisfy a tax liability. The
Federal Tax Lien Revolving Fund, established in accordance with Title
26 United States Code, Section 7810, is used to redeem real property
foreclosed upon by a holder of a lien. The IRS may sell the property,
reimburse the revolving fund in an amount equal to the redemption and
apply the net proceeds to the outstanding tax obligation.
E. Cash and Other Monetary Assets:
Imprest funds are maintained by headquarters and field offices in
commercial bank accounts. Other monetary assets consist primarily of
offers in compromise, voluntary deposits received from taxpayers
pending application of the funds to unpaid tax assessments and seized
monies pending the results of criminal investigations.
F. Federal Taxes Receivable, Net and Due to Treasury:
Federal taxes receivable, net and the corresponding liability, due to
Treasury, are not accrued until related tax returns are filed or
assessments are made by the IRS and agreed to by either the taxpayer or
the court. Additionally, the prepayments are netted against
liabilities. Accruals are made to reflect penalties and interest on
taxes receivable through the balance sheet date.
Taxes receivable consist of unpaid assessments (taxes and associated
penalties and interest) due from taxpayers. The existence of a
receivable is supported by a taxpayer agreement, such as filing of a
tax return without sufficient payment, or a court ruling in favor of
the IRS. The allowance reflects an estimate of the portion of total
taxes receivable deemed to be uncollectible.
Compliance assessments are unpaid assessments which neither the
taxpayer nor a court has affirmed the taxpayer owes to the Federal
government. Examples include assessments resulting from an IRS audit or
examination in which the taxpayer does not agree with the results.
Write-offs consist of unpaid assessments for which the IRS does not
expect further collections due to factors such as taxpayers'
bankruptcy, insolvency, or death. Compliance assessments and write-offs
are not reported on the balance sheet. Statutory provisions require the
accounts to be maintained until the statute for collection expires.
Tax Assessments:
Under the Internal Revenue Code (26 USC) Section 6201, the Secretary of
the Treasury is authorized and required to make inquiries,
determinations, and assessments of all taxes imposed and accruing under
any internal revenue law which have not been duly paid including
interest, additions to the tax, and assessable penalties. The Secretary
has delegated this authority to the Commissioner of the IRS. Unpaid
assessments result from taxpayers filing returns without sufficient
payments and from the enforcement programs of the IRS, such as
examination, under-reporter, substitute for return, and combined annual
wage reporting.
Abatements:
Under the Internal Revenue Code (26 USC) Section 6404, the Commissioner
of the IRS has authority to abate the paid or unpaid portion of an
assessed tax, interest, and penalty. Abatements occur for a
number of reasons and are a normal part of the tax administration
process. Abatements may:
* Be allowed for a qualifying corporation claiming a net operating loss
which created a credit. The credit can be carried back to reduce a
prior year's tax liability and amend tax returns. Additionally, the
credit can correct an assessment from an enforcement program, taxes
discharged in bankruptcy, accepted offers in compromise, penalty
abatements for reasonable cause, contested assessments made due to
mathematical or clerical errors and assessments contested after the
liability has been satisfied.
* Result in claims for refunds or a reduction of the unpaid assessed
amount.
G. Property and Equipment:
Property and equipment is recorded at historical cost. It consists of
tangible assets and software. The IRS depreciates property and
equipment on a straight line basis over its estimated useful life. In
the first and final years, one-half year depreciation is taken.
Disposals are recorded when deemed material.
The IRS capitalization policy for property and equipment is presented
by asset class and capitalization threshold.
Asset Class: ADP equipment;
Capitalization Threshold: Capitalized regardless of acquisition cost.
Asset Class: Non-ADP equipment;
Capitalization Threshold: Individual asset cost of $5 thousand or
greater.
Asset Class: Furniture;
Capitalization Threshold: Individual asset cost of $5 thousand or
greater.
Asset Class: Investigative equipment;
Capitalization Threshold: Individual asset cost of $5 thousand or
greater.
Asset Class: Vehicles;
Capitalization Threshold: Capitalized regardless of acquisition cost.
Asset Class: Major systems;
Capitalization Threshold: Projects with costs of $20 million or
greater.
Asset Class: Internal Use Software;
Capitalization Threshold: Major business systems modernization projects
independent of cost.
Asset Class: Leasehold Improvements;
Capitalization Threshold: Capitalized regardless of acquisition cost.
Asset Class: Assets under capital lease;
Capitalization Threshold: Assets with bulk cost of $50 thousand or
greater.
ADP Equipment includes related commercial off-the-shelf software. Major
systems was a category for large-scale computer systems prior to
Statement of Federal Financial Accounting Standards No. 10 (SFFAS No.
10), Accounting for Internal Use Software.
Internal Use Software captures the costs of major Business Systems
Modernization projects in accordance with SFFAS No. 10. It encompasses
software design, development and testing of projects adding significant
new functionality and long-term benefits. Costs for developing internal
use software are accumulated in work in process until final acceptance
and testing are successfully completed. When the software is completed
and placed into service, the costs are transferred to depreciable
property.
H. Federal Tax Refunds Payable and Due from Treasury:
Federal tax refunds payable is a fully funded liability and is offset
with a corresponding asset due from Treasury. The IRS records due from
Treasury to designate approved funding to pay year-end tax refund
liabilities to taxpayers.
I. Financing Sources and Revenues:
Appropriations Received:
The IRS receives the majority of its funding through annual, multi-
year, and no-year appropriations available for use within statutory
limits for operating and capital expenditures. Appropriations are
recognized as budgetary financing sources when the related expenses are
incurred.
Appropriations:
* Taxpayer Services;
* Operations Support;
* Enforcement;
* Other Appropriations.
Taxpayer Services provides funds for the direct costs of the Taxpayer
Assistance and Education and the Filing and Account Services Programs
discussed in Note 1. J., Program Costs.
Enforcement provides resources for the direct costs of the Compliance
Program discussed in Note 1. J., Program Costs. Additionally, it funds
the direct costs of administration of the Earned Income Tax Credit
Program (EITC).
Operations Support funds the indirect costs of all programs. Activities
include executive planning and direction; shared service support for
facilities, rent, utilities and security; procurement, printing and
postage; headquarters activities such as strategic planning, finance,
human resources and Equal Employment Opportunity; research and
statistics of income; and information systems, data processing and
telecommunication.
Other Appropriations include Business Systems Modernization (BSM),
Administrative Expenses-Recovery Act and Health and Insurance Tax
Credit Administration. BSM provides resources for the planning and
capital asset acquisition of information technology to modernize the
business systems. Additionally, BSM is obligated pursuant to an
expenditure plan approved by Congress. Administrative Expenses -
Recovery Act supports the funding for the administration of new and
expanded tax credit programs of the ARRA. Health and Insurance Tax
Credit Administration provides funding for health insurance and
refundable tax credits to qualified individuals. Additional funding was
included by the ARRA to implement and administer the health insurance
tax credit under the Trade Adjustment Assistance Health Coverage
Improvement Act of 2009.
Exchange Revenues:
Exchange revenues recognized by the IRS represent reimbursements and
user fees. Reimbursements are recognized as the result of costs
incurred for services performed for Federal agencies or the public
under reimbursable agreements. User fees are derived from transactions
with the public and are recognized when the fees are collected.
Non-exchange Revenues ” Earmarked Funds:
Non-exchange revenues represent amounts retained from tax collections
for payments to private collection agencies (PCAs) and for enforcement
activities. The Private Collection Agent Program authorizes contracts
with PCAs to collect delinquent taxes on behalf of the IRS not to
exceed 25 percent of the total taxes collected. Additionally, the IRS
retains 25 percent of the total taxes collected to fund enforcement
activities. This program is discussed in Note 1.L., Earmarked Funds.
Imputed Financing Sources:
Other financing sources include imputed financing sources to offset the
imputed costs recognized for goods or services received from other
Federal agencies without reimbursement from the IRS. The imputed costs
are pension and other retirement benefit costs administered by the
Office of Personnel Management, costs of processing payments and
collections by the Financial Management Service and legal judgments
paid by the Treasury Judgment Fund.
J. Program Costs:
Taxpayer Assistance and Education provides services to taxpayers to
assist them in preparing returns accurately. Primary activities include
tax forms and instructions; tax publications and information; taxpayer
education and outreach programs; walk-in taxpayer assistance; and the
National Distribution Center to process orders for forms and
publications. Earned revenues are primarily from enrolled agents fees.
Filing and Account Services perform functions of processing tax
returns, recording tax payments, issuing refunds, and maintaining
taxpayer accounts. Program activities include submission processing;
operating taxpayer assistance call centers and websites; and Taxpayer
Advocate. Earned revenues are primarily from the Tax Refund Offset
Program and tax return copying and verification.
Compliance manages activities to identify and correct possible errors
or underpayments. This program includes pre-filing agreements, letter
rulings and determinations; exam functions of document matching, desk
and field exams; collection functions of notices, Automated Collection
Systems and field collections; criminal investigations of tax, money
laundering and illegal drug activities; and Appeals and Chief Counsel.
Earned revenues are primarily from the Treasury Forfeiture Fund,
Financial Crimes Enforcement Network, installment agreement fees,
offers in compromise and letter rulings and determinations.
Administration of Tax Credit Programs oversees the Earned Income Tax
Credit (EITC) and Health Coverage Tax Credit (HCTC) programs. EITC
performs expanded customer service, public outreach, enforcement, and
research efforts to reduce claims and erroneous filings associated with
the program. EITC comprises the full spectrum of taxpayer services and
compliance activities. However, EITC payments actually refunded to
individuals or credited against other tax liabilities are not included
in program costs.
HCTC activities are focused on implementing the health insurance tax
credit program set out in the Trade Adjustment Assistance Reform Act of
2002 (Trade Act of 2002). These costs do not encompass payments made to
health insurance carriers on behalf of participants or tax credits
refunded to qualifying individuals.
K. Custodial Activity:
Non-exchange Revenues:
The IRS collects custodial non-exchange revenues for taxes levied
against taxpayers for: individual and corporate income, Federal
Insurance Contributions Act (FICA) and Self-Employment Contribution Act
(SECA), excise, estate, gift, railroad retirement and Federal
unemployment taxes. These collections are not available to the IRS for
obligation or expenditure and are recognized as custodial revenues when
collected. The disposition of these revenues is reported on the
Statement of Custodial Activity and as distribution of federal tax
revenue to the general fund of the U.S. Treasury.
Permanent Indefinite Appropriations:
The IRS was granted permanent and indefinite budgetary authority
through legislation to disburse tax refund principle and related
interest as they become due. The permanent and indefinite
appropriations are not subject to budgetary ceilings set by Congress
during the annual appropriation process.
Refunds due to taxpayers are reported as federal tax refunds payable on
the Balance Sheet. The IRS records an offsetting asset, due from
Treasury, to reflect the year-end budget authority to pay this
liability.
Disbursements for tax refunds and related interest, reported on the
Statement of Custodial Activity, are offset by appropriations used for
refunds. Disbursements for refunds are not a cost to the IRS, but
rather a cost to the Federal government as a whole.
L. Earmarked Funds:
Earmarked funds are financed by specifically identified revenues which
remain available over time. These specifically identified revenues are
required by statute to be used for designated activities, benefits or
purposes and must be accounted for separately from the Federal
government's general revenues.
The Federal Tax Lien Revolving Fund (20X4413) was established pursuant
to section 112(a) of the Federal Tax Lien Act of 1966, to serve as the
source of financing the redemption of real property by the United
States.
The Private Collection Agent Program (20X5510) was established under
the American Jobs Creation Act of 2004. The IRS was authorized to enter
into contracts with PCAs to assist in the collection of delinquent
Federal tax liabilities. A portion of the collections was retained by
the IRS to pay the PCAs and fund enforcement activities. The Omnibus
Appropriations Act, 2009 (P.L. 111-8), Section 106, stipulated "None of
the funds made available in this Act may be used to enter into, renew,
extend, administer, implement, enforce or provide oversight of any
qualified tax collection contract." The PCA Program effectively ended
on March 5, 2009 when the IRS Commissioner announced the program would
not renew contracts with the private debt collection agencies.
M. Allocation Transfers:
The IRS is a party to allocation transfers from the Department of
Transportation's (Transportation) Federal Highway Administration as a
receiving entity. Obligations and outlays incurred by the IRS are
charged to the allocation account as it executes the delegated activity
on behalf of Transportation. Financial activity for the allocations
transfers are reported in the financial statements of Transportation.
N. Fiduciary Activities:
Fiduciary activities are the collection or receipt, and the management,
protection, accounting, investment and disposition by the Federal
government of cash or other assets in which non-Federal individuals or
entities have an ownership interest the Federal government must uphold.
The IRS fiduciary activities include the net collections for a taxable
year from United States military and federal employees working in the
United States (U.S.) territories of the Northern Mariana Islands, the
U.S. Virgin Islands, Guam and American Samoa. These fiduciary assets
are not assets of the IRS. Beginning in FY 2009, fiduciary activities
are not recognized on the balance sheet. (See Notes 4 and 15)
0. Employee Compensation and Benefits:
Accrued Annual, Sick, and Other Leave:
Annual and compensatory leave is expensed with an offsetting liability
as it is earned and the liability is reduced as leave is taken. Each
year, the balance in the accrued annual leave liability account is
adjusted to reflect current pay rates. To the extent current or prior
year appropriations are not available to fund annual and compensatory
leave earned but not taken, funding will be obtained from future
financing sources. Sick leave and other types of non-vested leave are
expensed as taken.
Federal Employees Compensation Act:
The Federal Employees Compensation Act (FECA) provides income and
medical cost protection to covered federal civilian employees injured
on the job, to employees who have incurred work-related occupational
diseases, and to beneficiaries of employees whose deaths are
attributable to job-related injuries or occupational diseases. The FECA
program is administered by the U.S. Department of Labor (DOL), which
pays valid claims and subsequently seeks reimbursement for claims paid.
Accrued FECA liability represents amounts due to DOL for claims paid on
behalf of the IRS. Actuarial FECA liability represents the liability
for future workers' compensation benefits, which includes the expected
liability for death, disability, medical, and miscellaneous costs for
approved cases. DOL estimates the liability for future payments as a
result of past events.
Employee Pension Benefits:
The IRS employees participated in the Civil Service Retirement System
(CSRS) or the Federal Employees Retirement System (FERS). For employees
covered by CSRS, the IRS contributes 7% of the employees' gross pay for
regular and 7.5% for law enforcement officers' retirement. For
employees covered by FERS, the IRS contributes 11.2% of employees'
gross pay for regular and 24.9% for law enforcement officers'
retirement.
Employees covered by CSRS and FERS are eligible to contribute to a
Thrift Savings Plan (TSP). For those employees participating in the
FERS, a TSP account is automatically established, and IRS makes a
mandatory contribution to this plan equal to one percent of the
employees' compensation as well as matching contributions ranging from
one to four percent of the employees' compensation for FERS-eligible
employees who contribute to their TSP. No matching contributions are
made to the TSP for employees participating in the CSRS.
Employee Health and Life Insurance Benefits:
Employees are eligible to participate in the Federal Employees Health
Benefit Program (FEHB) and Federal Employees Group Life Insurance
Program (FEGLI). Employees participating in the FEGLI program can
obtain basic term life insurance, with the employee paying two-thirds
of the cost and IRS paying one-third. Additional coverage is optional,
to be paid fully by the employee. The basic life coverage may be
continued into retirement if certain requirements are met. The IRS
recognizes the full cost of providing these benefits.
P. Use of Estimates:
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions related to the reporting
of assets, liabilities, revenues, and expenses and the disclosure of
contingent liabilities. Actual results could differ from those
estimates.
Internal Revenue Service:
Notes to the Financial Statements
For the Years Ended September 30, 2009 and 2008:
Note 2. Fund Balance with Treasury:
(In Millions)
General Funds:
2009: $2,300:
2008: $1,986.
Special Funds:
2009: $158;
2008: $82.
Revolving Funds:
2009: $6;
2008: $5.
Other Funds:
2009: ($1);
2008: ($1).
Fund Balance with Treasury:
2009: $2,463;
2008: $2,072.
Unobligated balances:
Available:
2009: $384;
2008: $224.
Unavailable:
2009: $503;
2008: $466.
Obligated Balance not yet disbursed:
2009: $1,586;
2008: $1,394.
Non-Budgetary FBWT:
2009: ($10);
2008: ($12).
Status of Fund Balance with Treasury:
2009: $2,463;
2008: $2,072.
Note 3. Other Assets:
Advances:
2009: Intra-governmental: $117;
2009: With the Public: $7;
2008: Intra-governmental: $137;
2008: With the Public: $9.
Accounts receivable, net:
2009: Intra-governmental: $26;
2009: With the Public: $3;
2008: Intra-governmental: $45;
2008: With the Public: $5;
Forfeited property held for sale:
2009: Intra-governmental: [Empty];
2009: With the Public: $2;
2008: Intra-governmental: [Empty];
2008: With the Public: $3.
Clearing accounts:
2009: Intra-governmental: $4;
2009: With the Public: [Empty];
2008: Intra-governmental: $4;
2008: With the Public: [Empty].
Other Assets"
2009: Intra-governmental: $147;
2009: With the Public: $12;
2008: Intra-governmental: $186;
2008: With the Public: $17.
Note 4. Cash and Other Monetary Assets:
Imprest Fund:
2009: $4;
2009: $4.
Other monetary assets:
2009: $59;
2009: $129.
Cash and Other Monetary Assets:
2009: $63;
2009: $133;
In FY 2009, fiduciary assets are not recognized on the balance sheet.
In FY 2008, other monetary assets included fiduciary cash totaling $9
million.
Note 5. Federal Taxes Receivable, Net and Due to Treasury:
(In Billions)
Federal taxes receivable:
2009: $128;
2008: $112.
Allowance for uncollectible taxes receivable:
2009: ($99);
2008: ($83).
Federal taxes receivable, net and Due to Treasury:
2009: $29;
2008: $29.
Federal taxes receivable consists of tax assessments, penalties and
interest not paid or abated which were agreed to by the taxpayer and
the IRS or upheld by the courts. Federal taxes receivable, net is the
portion of gross Federal taxes receivable estimated to be collectible.
It is based on projections of collectibility from a statistical sample
of taxes receivable. The allowance for uncollectible taxes receivable
was established for the difference between the gross Federal taxes
receivable and the portion estimated to be collectible. Due to Treasury
is the offsetting liability to Federal taxes receivable, net, and
represents amounts to be transferred to Treasury when collected.
Note 6. Non-entity Assets:
(In Millions)
Due from Treasury:
2009: Intra-governmental: $4,031;
2009: With the Public: [Empty];
2008: Intra-governmental: $3,064;
2008: With the Public: [Empty].
Federal taxes receivable, net:
2009: Intra-governmental: [Empty];
2009: With the Public: $29,000;
2008: Intra-governmental: [Empty];
2008: With the Public: $29,000.
Other monetary assets
2009: Intra-governmental: [Empty];
2009: With the Public: $59;
2008: Intra-governmental: [Empty];
2008: With the Public: $129.
Non-entity Assets:
2009: Intra-governmental: $4,031;
2009: With the Public: $29,059;
2008: Intra-governmental: $3,064;
2008: With the Public: $29,129.
Non-entity assets are not available for use by the IRS. Federal taxes
receivable are collected for the U.S. Government, but the IRS does not
have the authority to spend them.
Note 7. Property and Equipment:
(In Millions)
ADP assets:
Useful Cost (Years): 3 to 7;
Cost: $1,522;
Accumulated Depreciation: ($1,111);
2009 Net Book Value: $411;
2008 Net Book Value: $420.
Internal use software:
Useful Cost (Years): 3 to 7:
Cost: $969;
Accumulated Depreciation: ($540);
2009 Net Book Value: $429;
2008 Net Book Value: $363.
Leasehold improvements:
Useful Cost (Years): 10;
Cost: $397;
Accumulated Depreciation: ($258);
2009 Net Book Value: $139;
2008 Net Book Value: $153.
Major systems
Useful Cost (Years): 7;
Cost: $422;
Accumulated Depreciation: ($422);
2009 Net Book Value: [Empty];
2008 Net Book Value: [Empty].
Internal use software ” work in process:
Cost: $75;
Accumulated Depreciation: [Empty];
2009 Net Book Value: $75;
2008 Net Book Value: $172;
Vehicles:
Useful Cost (Years): 5;
Cost: $64;
Accumulated Depreciation: ($37);
2009 Net Book Value: $27;
2008 Net Book Value: $30.
Furniture and non-ADP equipment:
Useful Cost (Years): 8 to 10;
Cost: $37;
Accumulated Depreciation: ($25);
2009 Net Book Value: $12;
2008 Net Book Value: $13.
Assets under capital lease:
Useful Cost (Years): 4;
Cost: $19;
Accumulated Depreciation: ($19);
2009 Net Book Value: [Empty];
2008 Net Book Value: $7.
Investigative equipment:
Useful Cost (Years): 10;
Cost: $8;
Accumulated Depreciation: ($7);
2009 Net Book Value: $1;
2008 Net Book Value: $1.
Property and Equipment:
Cost: $3,513;
Accumulated Depreciation: ($2,419);
2009 Net Book Value: $1,094;
2008 Net Book Value: $1,159.
The Cost column represents the historical cost of property and
equipment, net of disposals. The cost basis for FY 2009 and FY 2008 is
$3,513 million and $3,924 million, respectively. Accumulated
depreciation for FY 2009 and FY 2008 is $2,419 million and $2,765
million, respectively.
The IRS has 11 internal use software projects, including deployed and
work in process.
* Modernized E-File is an electronic filing system for tax returns.
* Current Customer Account Data Engine (CADE) is a project to replace
the master files for taxpayer accounts.
* Account Management Services (AMS) is a project which establishes the
foundation for major compliance programs by providing the applications
to monitor and interface with taxpayers, issue enhanced notices and
deliver improved customer support and functionality.
* Integrated Financial System (IFS) is the IRS administrative financial
system.
* E-Services is a system of web-based products and services for tax
practitioners and the public.
* Enterprise Systems Management (ESM) is an infrastructure system
allowing remote monitoring and network management.
* Security and Technology Infrastructure Release (STIR) is the
infrastructure for information technology security.
* Customer Communications is a customer service telephone system.
* Internet Refund Fact of Filing allows taxpayers to review the status
of their refund.
* Redesign Revenue and Accounting System (RRACS) will add enhancements
to financial reporting of taxpayer receipts and add traceability
between summary records and the detailed subsidiary ledger (CDDB).
* The Custodial Detail Database (CDDB) is the subsidiary ledger for
RRACS which provides the functionality needed for custodial financial
management and reporting.
In FY 2009, the IRS terminated the Filing & Payment Compliance software
system. This system provided functionality to enable private debt
collection and manage delinquent tax cases. The net costs have been
recognized as a loss on disposal in FY 2009.
Internal Revenue Service:
Notes to the Financial Statements:
For the Years Ended September 30, 2009 and 2008:
Deployed Internal Use Software:
(In Millions)
Current CADE:
Cost: $267;
Accumulated Depreciation: ($82);
2009 Net Book Value: $185;
2008 Net Book Value: $95.
Modernized E-File:
Cost: $183;
Accumulated Depreciation: ($113);
2009 Net Book Value: $70;
2008 Net Book Value: $96.
Integrated Financial System:
Cost: $147;
Accumulated Depreciation: ($94);
2009 Net Book Value: $53;
2008 Net Book Value: $73.
E-Services:
Cost: $141;
Accumulated Depreciation: ($111);
2009 Net Book Value: $30;
2008 Net Book Value: $51.
AMS:
Cost: $79;
Accumulated Depreciation: ($3);
2009 Net Book Value: $76;
2008 Net Book Value: [Empty].
STIR:
Cost: $76;
Accumulated Depreciation: ($71);
2009 Net Book Value: $5;
2008 Net Book Value: $16.
Customer Communications:
Cost: $25;
Accumulated Depreciation: ($25);
2009 Net Book Value: [Empty];
2008 Net Book Value: [Empty].
Enterprise Systems Management:
Cost: $16;
Accumulated Depreciation: ($15);
2009 Net Book Value: $1;
2008 Net Book Value: $3.
Internet Refund Fact of Filing:
Cost: $15;
Accumulated Depreciation: ($14);
2009 Net Book Value: $1;
2008 Net Book Value: $3.
CDDB:
Cost: $8;
Accumulated Depreciation: ($1);
2009 Net Book Value: $7;
2008 Net Book Value: [Empty].
Other:
Cost: $12;
Accumulated Depreciation: ($11);
2009 Net Book Value: $1;
2008 Net Book Value: $5.
Filing & Payment Compliance:
Cost: [Empty];
Accumulated Depreciation: [Empty];
2009 Net Book Value: [Empty];
2008 Net Book Value: $21.
Deployed Internal Use Software:
Cost: $969;
Accumulated Depreciation: ($540);
2009 Net Book Value: $429;
2008 Net Book Value: $363.
Work in Process Internal Use Software:
(In Millions)
Modernized E-File:
2009: $49;
2008: $14.
Current CADE:
2009: $23;
2008: $108.
RRACS:
2009: $3;
2008: [Empty].
AMS:
2009: [Empty];
2008: $48.
CDDB:
2009: [Empty];
2008: $2.
Work in Process Internal Use Software:
2009: $75;
2008: $172.
Note 8. Liabilities:
(In Millions)
Other Liabilities:
Intragovernmental:
Accrued payroll and benefits:
2009: Current: $80;
2009: Non-Current: [Empty];
2009: Total: $80.
Accrued FECA liability:
2009: Current: $43;
2009: Non-Current: $55;
2009: Total: $98.
Accrued expense:
2009: Current: $30;
2009: Non-Current: [Empty];
2009: Total: $30.
Other Liabilities:
2009: Current: $153;
2009: Non-Current: $55;
2009: Total: $208.
With the Public:
Accrued annual leave:
2009: Current: $531;
2009: Non-Current: [Empty];
2009: Total: $531.
Actuarial FECA liability:
2009: Current: [Empty];
2009: Non-Current: $426;
2009: Total: $426.
Accrued payroll and benefits:
2009: Current: $340;
2009: Non-Current: [Empty];
2009: Total: $340.
Accrued expenses:
2009: Current: $215;
2009: Non-Current: [Empty];
2009: Total: $215.
Liability for Deposit Funds and Clearing Accounts:
2009: Current: $62;
2009: Non-Current: [Empty];
2009: Total: $62.
Accounts payable:
2009: Current: $85;
2009: Non-Current: [Empty];
2009: Total: $85.
Other Liabilities:
2009: Current: $1,233;
2009: Non-Current: $426;
2009: Total: $1,659.
Intragovernmental:
Accrued payroll and benefits:
2008: Current: $67;
2008: Non-Current: [Empty];
2008: Total: $67.
Accrued FECA liability:
2008: Current: $42;
2008: Non-Current: $55;
2008: Total: $97.
Accrued expense:
2008: Current: $33;
2008: Non-Current: [Empty];
2008: Total: $33.
Other Liabilities:
2008: Current: $142;
2008: Non-Current: $55;
2008: Total: $197.
With the Public:
Accrued annual leave:
2008: Current: $506;
2008: Non-Current: [Empty];
2008: Total: $506.
Actuarial FECA liability:
2008: Current: [Empty];
2008: Non-Current: $481;
2008: Total: $481.
Accrued payroll and benefits:
2008: Current: $290;
2008: Non-Current: [Empty];
2008: Total: $290.
Accrued expenses:
2008: Current: $221;
2008: Non-Current: [Empty];
2008: Total: $221.
Liability for Deposit Funds and Clearing Accounts:
2008: Current: $132;
2008: Non-Current: [Empty];
2008: Total: $132.
Accounts payable:
2008: Current: $52;
2008: Non-Current: [Empty];
2008: Total: $52.
Other Liabilities:
2008: Current: $1,204;
2008: Non-Current: $481;
2008: Total: $1,685.
Internal Revenue Service:
Notes to the Financial Statements:
For the Years Ended September 30, 2009 and 2008:
Liabilities Not Covered by Budgetary Resources:
(In Millions)
Accrued annual leave:
2009 Intra-governmental: [Empty];
2009 With the Public: $531;
2008 Intra-governmental: [Empty];
2008 With the Public: $506.
Actuarial FECA liability:
2009 Intra-governmental: [Empty];
2009 With the Public: $426;
2008 Intra-governmental: [Empty];
2008 With the Public: $481.
Accrued FECA liability:
2009 Intra-governmental: v98;
2009 With the Public: [Empty];
2008 Intra-governmental: $97;
2008 With the Public: [Empty].
Liabilities Not Covered by Budgetary Resources:
2009 Intra-governmental: $98;
2009 With the Public: $957;
2008 Intra-governmental: $97;
2008 With the Public: $987.
Liabilities not covered by budgetary resources include liabilities for
which congressional action is needed before budgetary resources can be
provided. Although future appropriations to fund these liabilities are
likely, it is not certain appropriations will be enacted to fund these
liabilities.
Note 9. Leases:
Capital Leases:
As of September 30, 2009, there is no net capital lease liability. In
FY 2008, the net capital lease liability was $3 million and the lease
for the ADP equipment was covered by budgetary resources. There are no
future lease payments.
Operating Leases:
(In Millions)
Fiscal Year: 2010;
Lease Payment: $11.
Fiscal Year: 2011;
Lease Payment: $12.
Fiscal Year: 2012;
Lease Payment: $10.
Fiscal Year: 2013;
Lease Payment: $5.
Fiscal Year: 2014;
Lease Payment: [Empty].
Fiscal Year: After 2014;
Lease Payment: [Empty].
Total Future Lease Payments:
Lease Payment: $38.
The IRS leases office space from commercial entities under five year
non-cancelable operating leases. Future lease payments under non-
cancelable leases of office spaces are presented above.
Additionally, the IRS has annual operating leases with the General
Services Administration for office space and vehicles and with
commercial entities for equipment. These leases are cancelable or
renewable on an annual basis at the option of the IRS. They do not
impose binding commitments on the IRS for future rental payments on
leases with terms longer than one year.
Note 10. Commitments and Contingencies:
The IRS is a party to legal actions whose outcome, if unfavorable,
could materially affect the financial statements. For some of these
actions, management and legal counsel have determined the likelihood of
an unfavorable outcome is remote. As of September 30, 2009 and 2008,
there were no estimated contingent liabilities arising from these
actions.
For some of the legal actions to which the IRS is a party, management
and legal counsel cannot determine the likelihood of an unfavorable
outcome nor can any related loss be reasonably estimated. The IRS does
not accrue for possible losses related to cases where the potential
loss cannot be estimated or the likelihood of an unfavorable outcome is
less than probable. As of September 30, 2009 and 2008, there were two
cases and three cases, respectively for which management and legal
counsel are unable to determine the likelihood of an unfavorable
outcome or establish a range of potential losses.
As of September 30, 2009 and 2008, the IRS does not have contractual
commitments for payments on obligations related to canceled
appropriations.
Note 11. Cost and Earned Revenue by Programs:
(In Millions)
2009:
Intragovernmental Gross Cost:
Taxpayer Assistance and Education: $88;
Filing and Account Services: $1,639;
Compliance: $2,372;
Administration of Tax Credit: $43;
Total: $4,142.
Gross Costs with the Public:
Taxpayer Assistance and Education: $468;
Filing and Account Services: $2,311;
Compliance: $5,803;
Administration of Tax Credit: $147;
Total: $8,729.
Program Costs:
Taxpayer Assistance and Education: $556;
Filing and Account Services: $3,950;
Compliance: $8,175;
Administration of Tax Credit: $190;
Total: $12,871.
Intragovemmental Earned Revenue:
Taxpayer Assistance and Education: ($2);
Filing and Account Services: ($12);
Compliance: ($41);
Administration of Tax Credit: [Empty];
Total: ($55).
Earned Revenue from the Public:
Taxpayer Assistance and Education: ($3);
Filing and Account Services: ($56);
Compliance: ($254);
Administration of Tax Credit: [Empty];
Total: ($313).
Program Revenues:
Taxpayer Assistance and Education: ($5);
Filing and Account Services: ($68);
Compliance: ($295);
Administration of Tax Credit: [Empty];
Total: ($368).
Net Cost of Operations:
Taxpayer Assistance and Education: $551;
Filing and Account Services: $3,882;
Compliance: $7,880;
Administration of Tax Credit: $190;
Total: $12,503.
2008:
Intragovernmental Gross Cost:
Taxpayer Assistance and Education: $119;
Filing and Account Services: $1,494;
Compliance: $2,456;
Administration of Tax Credit: $41;
Total: $4,110.
Gross Costs with the Public:
Taxpayer Assistance and Education: $504;
Filing and Account Services: $2,108;
Compliance: $5,680;
Administration of Tax Credit: $143;
Total: $8,435.
Program Costs:
Taxpayer Assistance and Education: $623;
Filing and Account Services: $3,602;
Compliance: $8,136;
Administration of Tax Credit: $184;
Total: $12,545.
Intragovemmental Earned Revenue:
Taxpayer Assistance and Education: ($3);
Filing and Account Services: ($15);
Compliance: ($53);
Administration of Tax Credit: [Empty];
Total: ($71).
Earned Revenue from the Public:
Taxpayer Assistance and Education: ($3);
Filing and Account Services: ($46);
Compliance: ($232);
Administration of Tax Credit: [Empty];
Total: ($281).
Program Revenues:
Taxpayer Assistance and Education: ($6);
Filing and Account Services: ($61);
Compliance: ($285);
Administration of Tax Credit: [Empty];
Total: ($352).
Net Cost of Operations:
Taxpayer Assistance and Education: $617;
Filing and Account Services: $3,5412;
Compliance: $7,851;
Administration of Tax Credit: $184;
Total: $12,193.
Note 12. Statement of Budgetary Resources Obligations Incurred:
(In Millions)
Direct - Category B:
2009: $11,782;
2008: $11,342.
Reimbursable - Category B:
2009: $114;
2008: $142.
Obligations Incurred:
2009: $11,896;
2008: $11,484.
Category B apportionments distribute budgetary resources by activities
or programs and are restricted by purpose for which obligations can be
incurred.
Explanation of Differences Between the Statement of Budgetary Resources
and the President's Budget:
(In Millions)
Statement of Budgetary Resources (SBR):
Budgetary Resources: $12,174;
Obligations Incurred: $11,484;
Distributed Offsetting Receipts: $201;
Net Outlays: $11,051.
Included on SBR, not in President's Budget: Expired Funds;
Budgetary Resources: ($414);
Obligations Incurred: ($29);
Distributed Offsetting Receipts: [Empty];
Net Outlays: [Empty].
Included on SBR, not in President's Budget: Distributed Offsetting
Receipts:
Budgetary Resources: [Empty];
Obligations Incurred: [Empty];
Distributed Offsetting Receipts: ($201);
Net Outlays: $201.
Included on SBR, not in President's Budget: Other;
Budgetary Resources: [Empty];
Obligations Incurred: $8;
Distributed Offsetting Receipts: [Empty];
Net Outlays: $2.
Included in President's Budget, not on SBR: Tax credits and interest
refunds to taxpayers;
Budgetary Resources: $94,484;
Obligations Incurred: $94,484;
Distributed Offsetting Receipts: [Empty];
Net Outlays: $94,484.
Included in President's Budget, not on SBR: Payments to informants;
Budgetary Resources: $22;
Obligations Incurred: $22;
Distributed Offsetting Receipts: [Empty];
Net Outlays: $22.
Budget of the United States Government:
Budgetary Resources: $$106,266;
Obligations Incurred: $$105,969;
Distributed Offsetting Receipts: [Empty];
Net Outlays: $105,760.
The FY 2011 Budget of the United States Government (President's Budget)
presenting the actual amounts for the year ended September 30, 2009 has
not been published as of the issue date of these financial statements.
The FY 2011 President's Budget is scheduled for publication in February
2010. A reconciliation of the FY 2008 column on the Statement of
Budgetary Resources (SBR) to the actual amounts for FY 2008 in the FY
2010 President's Budget for budgetary resources, obligations incurred,
distributed offsetting receipts, and net outlays is presented above.
The President's Budget includes appropriations for EITC, Child Tax
Credit, HCTC, interest relating to taxpayer refunds and informant
payments totaling $94.5 billion. The majority of the appropriations
represent budgetary resources and outlays of payments to taxpayers for
credits that exceed the taxpayer's income tax liability and interest
paid on refunds of collections.
Undelivered Orders at the End of Period:
Undelivered orders are the value of goods and services ordered and
obligated which have not been received. This amount includes any orders
which may have been prepaid or advanced but for which delivery or
performance has not yet occurred. Undelivered orders were $985 million
and $917 million for the periods ended September 30, 2009 and 2008,
respectively.
Note 13. Collections of Federal Tax Revenue:
(In Billions)
Individual income, FICA/SECA, and other:
Tax Year 2009: $1,297[A];
Tax Year 2008: $702;
Tax Year 2007: $22;
Prior Years: $15;
Collections Received FY 2009: $2,036;
Collections Received FY 2008: $2,295.
Corporate income:
Tax Year 2009: $137[B];
Tax Year 2008: $69;
Tax Year 2007: $2;
Prior Years: $17;
Collections Received FY 2009: $225;
Collections Received FY 2008: $354.
Excise:
Tax Year 2009: $34;
Tax Year 2008: $13;
Tax Year 2007: [Empty];
Prior Years: [Empty];
Collections Received FY 2009: $47;
Collections Received FY 2008: $52.
Estate and gift:
Tax Year 2009: [Empty];
Tax Year 2008: $4;
Tax Year 2007: $1;
Prior Years: $20;
Collections Received FY 2009: $25;
Collections Received FY 2008: $30.
Railroad retirement:
Tax Year 2009: $4;
Tax Year 2008: $1;
Tax Year 2007: [Empty];
Prior Years: [Empty];
Collections Received FY 2009: $5;
Collections Received FY 2008: $5.
Federal unemployment:
Tax Year 2009: $5;
Tax Year 2008: $2;
Tax Year 2007: [Empty];
Prior Years: [Empty];
Collections Received FY 2009: $7;
Collections Received FY 2008: $7.
Collections of Federal Tax Revenue:
Tax Year 2009: $1,477;
Tax Year 2008: $791;
Tax Year 2007: $25;
Prior Years: $52;
Collections Received FY 2009: $2,345;
Collections Received FY 2008: $2,743.
[A] Includes other collections of $514 million.
[B] Includes tax year 2010 corporate income tax receipts of $9 trillion
In FY 2009, individual income, FICA/SECA, and other taxes include $83
billion in payroll taxes collected from other Federal agencies.
Note 14. Federal Tax Refund Activity:
(In Billions)
Individual income, FICA/SECA, and other:
Tax Year 2009: $1;
Tax Year 2008: $294;
Tax Year 2007: $31;
Prior Years: $14;
Collections Received FY 2009: $340;
Collections Received FY 2008: $369.
Corporate income:
Tax Year 2009: $7;
Tax Year 2008: $33;
Tax Year 2007: $17;
Prior Years: $38;
Collections Received FY 2009: $95;
Collections Received FY 2008: $55.
Excise:
Tax Year 2009: $34;
Tax Year 2008: $13;
Tax Year 2007: [Empty];
Prior Years: [Empty];
Collections Received FY 2009: $47;
Collections Received FY 2008: $52.
Estate and gift:
Tax Year 2009: [Empty];
Tax Year 2008: $1;
Tax Year 2007: [Empty];
Prior Years: $1;
Collections Received FY 2009: $2;
Collections Received FY 2008: $1.
Federal Tax Refund Activity:
Tax Year 2009: $8;
Tax Year 2008: $328;
Tax Year 2007: $49;
Prior Years: $53;
Collections Received FY 2009: $438;
Collections Received FY 2008: $426.
Refund disbursements include EITC, child tax credit and those enacted
under the ARRA. The Economic Stimulus Act of 2008 included provisions
to help stimulate the economy through recovery rebates. In FY 2008, the
IRS disbursed $94.3 billion of recovery rebates to eligible taxpayers.
(See Other Accompanying Information for discussion of refundable tax
credits.)
Note 15. Fiduciary Activities:
(In Millions)
Fiduciary net assets, beginning of year:
2009: 20X6737: ($2);
2009: 20X6738: $11;
2009: 20X6740: [Empty];
2009: 20X6741: [Empty];
2009: Total: $9;.
Contributions:
2009: 20X6737: $47;
2009: 20X6738: $37;
2009: 20X6740: $635;
2009: 20X6741: $18;
2009: Total: $737.
Disbursements to and on behalf of beneficiaries:
2009: 20X6737: ($45);
2009: 20X6738: ($30);
2009: 20X6740: ($635);
2009: 20X6741: ($18);
2009: Total: ($728).
Increase (Decrease) in fiduciary net Assets:
2009: 20X6737: $2;
2009: 20X6738: $7;
2009: 20X6740: [Empty];
2009: 20X6741: [Empty];
2009: Total: $9.
Fiduciary Net Assets, end of year:
2009: 20X6737: [Empty];
2009: 20X6738: $18;
2009: 20X6740: [Empty];
2009: 20X6741: [Empty];
2009: Total: $18.
The fiduciary net assets, end of the year balance of $18 million
remains in the fiduciary fund pending a tax matter resolution.
In accordance with Statement of Federal Financial Accounting Standards
No. 31, Accounting for Fiduciary Activities, fiduciary cash and other
assets are not assets of the Federal government. The IRS has four
fiduciary funds not reported on the balance sheet:
* Internal Revenue Collections for Northern Mariana Islands, 20X6737;
* Coverover Withholdings ” U.S. Virgin Islands, 20X6738;
* Coverover Withholdings ” Guam, 20X6740;
* Coverover Withholdings ”American Samoa, 20X6741.
Internal Revenue Code (26 USC) Section 7654 governs the tax
coordination between the governments of the United States and the U.S.
territories of the Northern Mariana Islands, the U.S. Virgin Islands,
Guam and American Samoa.
The collections of federal income taxes withheld from United States
military and federal employees who are working in these U.S.
territories are maintained in fiduciary funds of the IRS. The
disbursements of these collections to these U.S. territory governments
represent the transfer of the individual tax liability for a taxable
year.
Note 16. Reconciliation of Net Cost of Operations to Budget:
(In Millions)
Resources used to finance activities:
Obligations incurred:
2009: $11,896;
2008: $11,484.
Spending authority from offsetting collections and recoveries:
2009: ($224);
2008: ($264).
Distributed offsetting receipts:
2009: ($233);
2008: ($201).
Other exchange revenues not in budget:
2009: ($51);
2008: ($40).
Imputed financing:
2009: $1,123;
2008: $1,067.
Transfers in/out without reimbursement:
2009: $21;
2008: $30.
Total:
2009: $12,532;
2008: $12,076.
Resources that do not fund net cost of operations:
Changes in goods, services and benefits ordered but not yet received or
provided:
2009: ($64);
2008: $40,
Costs capitalized on the balance sheet;
2009: $300);
2008: ($321).
Total:
2009: ($364);
2008: ($281).
Costs that do not require resources In current period:
Depreciation and amortization;
2009: $320;
2008: $333.
Increase (Decrease) in unfunded liabilities;
2009: ($29);
2008: $41.
Revaluation of assets and liabilities;
2009: $42;
2008: $22.
Other;
2009: $2;
2008: $2.
Total:
2009: $335;
2008: $398.
Net Cost of Operations:
2009: $12,503;
2008: $12,193.
In accordance with Statement of Federal Financial Accounting Standards
No. 7 (SFFAS No. 7), Accounting for Revenue and Other Financing Sources
and Concepts for Reconciling Budgetary and Financial Accounting, a
reconciliation is required for the relationship between the budgetary
resources obligated during the period for the programs and operations
of the IRS to the net cost of operations. The budgetary accounting
reports the obligations and outlays of financial resources to acquire
or provide goods and services and the accrual basis of financial
accounting reports the net cost of resources used.
[End of section]
Required Supplementary Information:
Internal Revenue Service:
Required Supplementary Information - Unaudited:
For the Years Ended September 30, 2009 and 2008:
Schedule of Budgetary Resources by Major Budget Accounts:
(In Millions)
2009:
Budgetary Resources:
Unobligated Balance, Brought Forward, October 1;
Taxpayer Service: $181;
Enforcement: $100;
Operations Support: $184;
Other Appropriations: $225;
Total: $890.
Recoveries of Prior Year Unpaid Obligations;
Taxpayer Service: $23;
Enforcement: $20;
Operations Support: $47;
Other Appropriations: $4;
Total: $94.
Budget Authority: Appropriations;
Taxpayer Service: $2,293;
Enforcement: $5,118;
Operations Support: $3,888;
Other Appropriations: $574;
Total: $11,851.
Budget Authority: Spending Authority from Offsetting Collections;
Taxpayer Service: $30;
Enforcement: $53;
Operations Support: $41;
Other Appropriations: $8;
Total: $130.
Nonexpenditure Transfers, Net;
Taxpayer Service: $129;
Enforcement: $1;
Operations Support: $44;
Other Appropriations: ($44);
Total: $130.
Permanently Not Available;
Taxpayer Service: ($49);
Enforcement: ($28);
Operations Support: ($30);
Other Appropriations: ($7);
Total: ($112).
Total Budgetary Resources;
Taxpayer Service: $2,607;
Enforcement: $5,266;
Operations Support: $4,152;
Other Appropriations: $758;
Total: $12,783.
Status of Budgetary Resources:
Obligations Incurred;
Taxpayer Service: $2,451;
Enforcement: $5,178;
Operations Support: $3,935;
Other Appropriations: $334;
Total: $11,898.
Unobligated Balance ” Available;
Taxpayer Service: $23;
Enforcement: $18;
Operations Support: $102;
Other Appropriations: $243;
Total: $384.
Unobligated Balance ” Not Available;
Taxpayer Service: $133;
Enforcement: $74;
Operations Support: $115;
Other Appropriations: $181;
Total: $503.
Total Status of Budgetary Resources;
Taxpayer Service: $2,607;
Enforcement: $5,266;
Operations Support: $4,152;
Other Appropriations: $758;
Total: $12,783.
Change In Obligated Balance:
Obligated Balance, Net Brought Forward, October 1;
Taxpayer Service: $224;
Enforcement: $301;
Operations Support: $757;
Other Appropriations: $112;
Total: $1,394.
Obligations Incurred;
Taxpayer Service: $2,451;
Enforcement: $5,178;
Operations Support: $3,935;
Other Appropriations: $334;
Total: $11,898.
Gross Outlays;
Taxpayer Service: ($2,447);
Enforcement: ($5,049);
Operations Support: ($3,832);
Other Appropriations: (($296);
Total: ($11,824).
Recoveries of Prior Year Unpaid Obligations, Actual;
Taxpayer Service: ($23);
Enforcement: ($20);
Operations Support: ($47);
Other Appropriations: ($4);
Total: ($94).
Change in Uncollected Customer Payments from Federal Sources;
Taxpayer Service: [Empty];
Enforcement: $2;
Operations Support: $13;
Other Appropriations: [Empty];
Total: $15.
Obligated Balances, Net End of Period;
Taxpayer Service: $205;
Enforcement: $410;
Operations Support: $826;
Other Appropriations: $146;
Total: $1,587.
Net Outlays:
Gross Outlays;
Taxpayer Service: $2,447;
Enforcement: $5,049;
Operations Support: $3,832;
Other Appropriations: $298;
Total: $11,824.
Offsetting Collections;
Taxpayer Service: ($30);
Enforcement: ($55);
Operations Support: ($53);
Other Appropriations: ($6);
Total: ($144).
Distributed Offsetting Receipt;
Taxpayer Service: [Empty];
Enforcement: [Empty];
Operations Support: [Empty];
Other Appropriations: ($233);
Total: ($233).
Net Outlays;
Taxpayer Service: $2,417;
Enforcement: $4,994;
Operations Support: $3,779;
Other Appropriations: $57;
Total: $11,247.
2008:
Budgetary Resources:
Unobligated Balance, Brought Forward, October 1;
Taxpayer Service: $183;
Enforcement: $101;
Operations Support: $134;
Other Appropriations: $246;
Total: $664.
Recoveries of Prior Year Unpaid Obligations;
Taxpayer Service: $22;
Enforcement: $21;
Operations Support: $51;
Other Appropriations: $12;
Total: $106.
Budget Authority: Appropriations;
Taxpayer Service: $2,201;
Enforcement: $4,780;
Operations Support: $3,832;
Other Appropriations: $483;
Total: $11,296.
Budget Authority: Spending Authority from Offsetting Collections;
Taxpayer Service: $42;
Enforcement: $61;
Operations Support: $47;
Other Appropriations: $8;
Total: $158.
Nonexpenditure Transfers, Net;
Taxpayer Service: $163;
Enforcement: $6;
Operations Support: $96;
Other Appropriations: ($247);
Total: $18.
Permanently Not Available;
Taxpayer Service: ($34);
Enforcement: ($17);
Operations Support: ($16);
Other Appropriations: ($1);
Total: ($68).
Total Budgetary Resources;
Taxpayer Service: $2,577;
Enforcement: $4,952;
Operations Support: $4,144;
Other Appropriations: $501;
Total: $12,174.
Status of Budgetary Resources:
Obligations Incurred;
Taxpayer Service: $2,396;
Enforcement: $4,852;
Operations Support: $3,960;
Other Appropriations: $276;
Total: $11,484.
Unobligated Balance ” Available;
Taxpayer Service: $23;
Enforcement: $13;
Operations Support: $74;
Other Appropriations: $114;
Total: $224.
Unobligated Balance ” Not Available;
Taxpayer Service: $158;
Enforcement: $87;
Operations Support: $110;
Other Appropriations: $111;
Total: $466.
Total Status of Budgetary Resources;
Taxpayer Service: $2,577;
Enforcement: $4,952;
Operations Support: $4,144;
Other Appropriations: $501;
Total: $12,174.
Change In Obligated Balance:
Obligated Balance, Net Brought Forward, October 1;
Taxpayer Service: $235;
Enforcement: $296;
Operations Support: $753;
Other Appropriations: $143;
Total: $1,427.
Obligations Incurred;
Taxpayer Service: $2,396;
Enforcement: $4,852;
Operations Support: $3,960;
Other Appropriations: $276;
Total: $11,484.
Gross Outlays;
Taxpayer Service: ($2,447);
Enforcement: ($5,049);
Operations Support: ($3,832);
Other Appropriations: (($296);
Total: ($11,824).
Recoveries of Prior Year Unpaid Obligations, Actual;
Taxpayer Service: ($22);
Enforcement: ($21);
Operations Support: ($51);
Other Appropriations: ($12);
Total: ($106).
Change in Uncollected Customer Payments from Federal Sources;
Taxpayer Service: [Empty];
Enforcement: ($12);
Operations Support: ($11);
Other Appropriations: [Empty];
Total: ($23).
Obligated Balances, Net End of Period;
Taxpayer Service: $224;
Enforcement: $301;
Operations Support: $757;
Other Appropriations: $112;
Total: $1,394.
Net Outlays:
Gross Outlays;
Taxpayer Service: $2,385;
Enforcement: $4,814;
Operations Support: $3,894;
Other Appropriations: $295;
Total: $11,388.
Offsetting Collections;
Taxpayer Service: ($42);
Enforcement: ($49);
Operations Support: ($36);
Other Appropriations: ($9);
Total: ($136).
Distributed Offsetting Receipt;
Taxpayer Service: [Empty];
Enforcement: [Empty];
Operations Support: [Empty];
Other Appropriations: ($201);
Total: ($201).
Net Outlays;
Taxpayer Service: $2,343;
Enforcement: $4,765;
Operations Support: $3,858;
Other Appropriations: $85;
Total: $11,051.
Internal Revenue Service:
Required Supplementary Information - Unaudited:
For the Years Ended September 30, 2009 and 2008:
Other Claims for Refunds:
Management has estimated amounts which may be paid out as other claims
for tax refunds. This estimate represents an amount (principal and
interest) which may be paid for claims pending judicial review by the
Federal courts or, internally, by Appeals. In FY 2009, the total
estimated payout (including principal and interest) for claims pending
judicial review by the Federal courts is $4.7 billion and by Appeals is
$6.3 billion. In FY 2008, the total estimated payout (including
principal and interest) for claims pending judicial review by the
Federal courts was $5.0 billion and by Appeals was $17.0 billion. To
the extent judgments against the government in these cases prompt other
similarly situated taxpayers to file similar refund claims, these
amounts could become significantly greater.
Federal Taxes Receivable, Net:
In accordance with SFFAS No. 7, some unpaid assessments do not meet the
criteria for financial statement recognition as discussed in Note 1.
F., Federal Taxes Receivable, Net and Due to Treasury. Although
compliance assessments and write-offs are not considered receivables
under Federal accounting standards, they represent legally enforceable
claims of the IRS acting on behalf of the Federal government. There is,
however, a significant difference in the collection potential of these
categories.
The components of the total unpaid assessments and derivation of net
Federal taxes receivable were as follows:
(In Billions)
Total unpaid assessments:
2009: $308;
2008: $278.
Compliance assessments:
2009: ($75);
2008: ($67).
Write-offs:
2009: ($105);
2008: ($99).
Gross Federal taxes receivables:
2009: $128;
2008: $112.
Allowance for uncollectible taxes receivable:
2009: ($99);
2008: ($83).
Federal taxes receivable, net:
2009: $29;
2008: $29.
The IRS cannot reasonably estimate the amount of allowance for
uncollectible taxes receivable pertaining to its compliance
assessments, and thus cannot determine their net realizable value or
the value of the pre-assessment work-in-process.
To eliminate double-counting, the compliance assessments reported above
exclude trust fund recovery penalties, totaling $3 billion as of
September 30, 2009 and $4 billion as of September 30, 2008, which were
assessed against officers and directors of businesses who were involved
in the non-remittance of Federal taxes withheld from their employees.
The related unpaid assessments of those businesses are reported as
taxes receivable or write-offs, but the IRS may also recover portions
of those businesses' unpaid assessments from any and all individual
officers and directors against whom a trust fund recovery penalty is
assessed.
[End of section]
Other Accompanying Information:
Internal Revenue Service:
Other Accompanying Information - Unaudited:
For the Years Ended September 30, 2009 and 2008:
Statement of Net Cost by Responsibility Segment:
(In Millions)
Operating divisions:
WAGE;
2009: $3,323;
2008: $3,266.
SBSE;
2009: $2,702;
2008: $2,585.
LMSB;
2009: $884;
2008: $842.
TEGE;
2009: $286;
2008: $272.
Total;
2009: $7,195;
2008: $6,965.
Functional divisions:
Appeals;
2009: $238;
2008: $218.
Chief Counsel;
2009: $349;
2008: $326.
Criminal Investigations;
2009: $662;
2008: $632.
Taxpayer Advocate;
2009: $222;
2008: $207.
Communications;
2009: $28;
2008: $28.
Total;
2009: $1,499;
2008: $1,411.
Operating Net Cost;
2009: $8,694;
2008: $8,376.
General and Administration;
2009: $1,574;
2008: $1,598.
Information Technology;
2009: $1,872;
2008: $1,864.
Depreciation/Loss on Disposal;
2009: $363;
2008: $355.
Net Cost of Operations;
2009: $12,503;
2008: $12,193.
Refundable Tax Credits:
To provide tax relief to targeted individuals and businesses, Congress
has provided assistance in the form of tax credits. For the majority of
tax credits, the economic benefit is limited to the taxpayer's tax
liability. Credits limited in this manner are termed nonrefundable
There exists an additional class of tax credits however which are fully
payable to the taxpayer, even if the credit exceeds the tax liability.
These refundable credits provide a greater economic benefit as the
taxpayer realizes the full benefit of the calculated credit, unlimited
by any underlying tax liability.
The overview which follows summarizes the refundable credits which the
IRS administers and pays. Included in the overview are descriptions of
refundable credits in existence for many years as well as those enacted
as part of the American Recovery and Reinvestment Act of 2009 (ARRA).
The ARRA temporarily increased the benefits for several existing
refundable credits including the Earned Income Tax Credit (EITC) and
the Child Tax Credit. Additionally, ARRA authorized several new
refundable credits. The bulk of tax provisions in ARRA affect tax years
2009 and 2010.
Stimulus Credit:
In 2008 the Economic Stimulus Act provided taxpayers with a one-time
rebate. These rebates were mailed or sent via direct deposit to
individuals who filed a 2007 tax return and met certain eligibility
requirements. The IRS calculated the amount of the rebate based on 2007
income information. The maximum rebate payment was $600 for unmarried
persons and $1,200 for married couples, plus an additional $300 per
qualifying child.
Earned Income Tax Credit:
The Earned Income Tax Credit (EITC) is a refundable tax credit for low
to moderate income working individuals and families. Congress
originally approved the tax credit legislation in 1975 in part to
offset the burden of social security taxes and to provide an incentive
to work. To qualify, taxpayers must meet certain requirements and file
a tax return, even if they did not earn enough money to be obligated to
file a tax return.
ARRA temporarily increased the earned income tax credit for working
families to forty-five percent (45%) of the family's first $12,570 of
earned income for families with three or more children. Additionally,
the initial phase-out range for all married couples filing a joint
return increased (regardless of the number of children) by $1,880.
Additional Child Tax Credit:
The Child Tax Credit is a special credit for taxpayers who work, have
earnings below an established ceiling and have a qualifying child. The
Child Tax Credit is limited to the taxpayer's tax liability and is a
nonrefundable tax credit. However, certain individuals who receive less
than the full amount of the Child Tax Credit may qualify for the
"Additional" Child Tax Credit. Under this credit, subject to additional
criteria, the taxpayer may receive the full credit amount even if such
amount exceeds the taxpayer's tax liability. Consequently, the
Additional Child Tax Credit is categorized as a refundable tax credit.
Benefits of the credit were augmented under ARRA by increasing
eligibility for the credit in 2009 and 2010.
Health Care Tax Credit:
The Health Care Tax Credit was established to assist economically
dislocated workers in acquiring or continuing critical health care
coverage during periods of economic distress. Under this credit
participants can elect to take a portion of their premium as a credit
on their tax return. Alternatively, participants can elect to receive
direct reimbursements should they have insufficient tax liability
against which to apply the credit.
Individual Alternative Minimum Tax (AMT) Credit:
The Individual AMT refundable credit is calculated by referencing
specific timing items which produced an AMT liability in earlier years.
Timing items involve certain transactions such as incentive stock
options and adjustments for accelerated depreciation. Non timing
events, such as having a large number of exemptions or a large itemized
deduction for state and local taxes, will not qualify for the credit.
First-Time Home Buyer Credit:
Last year, Congress provided taxpayers with a refundable tax credit
equivalent to an interest-free loan equal to 10 percent of the purchase
of a home (up to $7,500) by a first-time home buyer. The provision
applied to homes purchased on or after April 9, 2008 and before July 1,
2009. Taxpayers receiving this tax credit are required to repay any
amount received under this provision back to the government over 15
years in equal installments, or, if earlier, when the home is sold. The
credit phases out for taxpayers with adjusted gross income in excess of
$75,000 ($150,000 in the case of a joint return).
Under ARRA, the bill eliminates the repayment obligation for taxpayers
who purchase homes after January 1, 2009, increases the maximum value
of the credit to $8,000, and removes the prohibition on financing by
mortgage revenue bonds Additionally, ARRA extended the availability of
the credit for homes purchased before December 1, 2009. The ARRA
provision retains the credit recapture if the house is sold within
three years of purchase.
Making Work Pay Credit and Credit for Certain Government Retirees:
The Making Work Pay Credit is a refundable tax credit calculated at a
rate of 6.2 percent of earned income, phasing out for taxpayers with
adjusted gross income in excess of $75,000 ($150,000 for married
couples filing jointly). Taxpayers receive this benefit through a
reduction in the amount of income tax withheld from their paychecks or
through claiming the credit on their tax returns. The Making Work Pay
Credit is reduced by a separate $250 credit (the Credit for Certain
Government Retirees) for government retirees who are not eligible for
Social Security benefits.
Build America and Recovery Zone Bonds:
Build America Bonds are a new financing tool for state and local
governments. The bonds, which allow a new direct federal payment
subsidy, are taxable bonds issued by state and local governments which
will give them access to the conventional corporate debt markets. At
the election of the state and local governments, the Treasury
Department will make a direct payment to the state or local
governmental issuer in an amount equal to 35 percent of the interest
payment on the Build America Bonds. As a result of this federal subsidy
payment, state and local governments will have lower net borrowing
costs and be able to reach more sources of borrowing than with more
traditional tax-exempt or tax credit bonds.
Created by the ARRA, Recovery Zone Bonds are targeted to areas
particularly affected by job losses and will help local governments
obtain financing for much needed economic development projects, such as
public infrastructure development.
COBRA Continuation Coverage for Unemployed Workers:
To assist persons in maintaining health coverage for themselves and
their families, ARRA provides a 65 percent subsidy for COBRA
continuation premiums for up to 9 months for workers who have been
involuntarily terminated. Additionally, this subsidy applies to health
care continuation coverage if required by states for small employers.
To qualify for premium assistance, a worker must be involuntarily
terminated between September 1, 2008 and December 31, 2009. The subsidy
would terminate upon an offer of any new employer-sponsored health care
coverage or Medicare eligibility. Workers who were involuntarily
terminated between September 1, 2008 and enactment, but failed to
initially elect COBRA because it was unaffordable, would be given an
additional 60 days to elect COBRA and receive the subsidy. To ensure
this assistance is targeted at workers who are most in need,
participants must attest their same year income will not exceed
$125,000 for individuals and $250,000 for families.
COBRA continuation coverage payments to workers are initially paid by
the employer. The employer receives reimbursement either as a direct
refund or through their payroll tax return where payments are taken as
a credit against existing withholdings and payroll taxes.
The following table summarizes refundable tax credit amounts paid in
2009 and 2008.
(In Millions)
Stimulus Credit;
2009: $2,024;
2008: $15,281.
Earned Income Tax Credit[A];
2009: $42,418;
2008: $40,600.
Additional Child Tax Credit[A];
2009: $24,284;
2008: $34,019.
Health Care Tax Credit[A];
2009: $113;
2008: $97.
Individual Alternative Minimum Tax (AMT) Credit;
2009: $711;
2008: [Empty].
First-Time Homebuyer Credit[A];
2009: $9,386;
2008: [Empty].
Making Work Pay Credit and Credit for Certain Government Retirees[B];
2009: $663;
2008: [Empty].
Build America and Recovery Zone Bonds[B];
2009: $19;
2008: [Empty].
COBRA Credit[B];
2009: $313;
2008: [Empty].
Corporate Alternative Minimum Tax (AMT) Credit;
2009: $24;
2008: [Empty].
Refundable Tax Credits;
2009: $79,955;
2008: $89,997.
[A] Existing refundable credits expanded under the ARRA.
[B] New refundable credits resulting from the ARRA.
Social Security and Medicare Taxes:
The Federal Insurance Contributions Act (FICA) provides for a Federal
system of old-age, survivors, disability, and hospital insurance
benefits. Payments to trust funds established for these programs are
financed by payroll taxes on employee wages and tips, employers'
matching payments, and a tax on self-employment income.
A portion of FICA benefits involves old-age, survivors, and disability
payments. These benefits are funded by the social security tax which is
currently 6.2 percent of wages and tips up to $106,800 and an employer
matching amount of 6.2 percent bringing the total rate to 12.4 percent.
These benefits are also funded by a self-employment tax of 12.4 percent
on self employment income up to $106,800 for calendar year 2009. The
income ceiling for both wages and tips and self-employment income was
$102,000 for calendar year 2008. Remaining benefits under FICA pertain
to hospital benefits (referred to as "Medicare") and are funded by a
separate 1.45 percent tax on all wages and tips (there is no wage
limit) and the employer matching contribution of 1.45 percent bringing
the total rate to 2.9 percent. Self-employed individuals pay a Medicare
tax of 2.9 percent on all self employment income. Social Security taxes
collected by the IRS were estimated to be approximately $661 billion
and $665 billion in FY 2009 and FY 2008, respectively. Medicare taxes
collected by the IRS were estimated to be approximately $192 billion
and $195 billion in FY 2009 and FY 2008, respectively. Social Security
taxes and Medicare taxes are included in individual income, FICA/SECA
and other on the Statement of Custodial Activity.
Tax Gap:
The tax gap is the difference between the amount of tax imposed by law
and what taxpayers actually pay on time. The tax gap arises from the
three types of noncompliance: not filing required tax returns on time
or at all (the nonfiling gap), underreporting the correct amount of tax
on timely filed returns (the underreporting gap), and not paying on
time the full amount reported on timely filed returns (the underpayment
gap). Of these three components, only the underpayment gap is observed;
the nonfiling gap and the underreporting gap must be estimated. The tax
gap, estimated to be about $345 billion for Tax Year 2001 (the most
recent estimate made), represents the amount of noncompliance with the
tax laws. Underreporting of tax liability accounts for 82 percent of
the gap, with the remainder almost evenly divided between nonfiling
(eight percent) and underpaying (ten percent). Part of the estimate is
based on data from a study of individual returns filed for tax year
2001. It does not include any taxes that should have been paid on
income from illegal activities. Each instance of noncompliance by a
taxpayer contributes to the tax gap, whether or not the IRS detects it,
and whether or not the taxpayer is even aware of the noncompliance.
Some of the tax gap arises from intentional (willful) noncompliance,
and some of it arises from unintentional mistakes.
The collection gap is the cumulative amount of tax, penalties, and
interest that has been assessed over many years, but has not been paid
by a certain point in time, and which the IRS expects to remain
uncollectible. In essence, it represents the difference between the
total balance of unpaid assessments and the net taxes receivable
reported on the balance sheet of the IRS. The tax gap and the
collection gap are related and overlapping concepts, but they have
significant differences. The collection gap is a cumulative balance
sheet concept for a particular point in time, while the tax gap is like
an income statement item for a single year. Moreover, the tax gap
estimates include all noncompliance, while the collection gap includes
only amounts that have been assessed (a small portion of all
noncompliance). Also, the tax gap includes only tax, while the
collection gap includes tax, penalties, and interest.
Tax Burden and Tax Expenditures:
The Internal Revenue Code provides for progressive rates of tax,
whereby higher incomes are generally subject to higher rates of tax.
The following graphs and charts present the latest available
information on income tax and adjusted gross income (AGI) for
individuals by AGI level and for corporations by size of assets. For
individuals, the information illustrates, in percentage terms, the tax
burden borne by varying AGI levels. For corporations, the information
illustrates, in percentage terms, the tax burden borne by these
entities by various sizes of their total assets. The graphs are only
representative of more detailed data and analysis available from the
Statistics of Income (501) office.
Total tax expenditures are the foregone Federal revenue resulting from
deductions and credits provided in the Internal Revenue Code. Since tax
expenditures directly affect funds available from government
operations, decisions to forego Federal revenue are as important as
decisions to spend Federal revenue.
Figure: Average Individual Income Tax Liability and Adjusted Gross
Income (AGI), Tax Year 2007:
[Refer to PDF for image: vertical bar graph]
Adjusted gross income (AGI): Under $15,000;
Number of taxable returns (in thousands): 37,597;
AGI (in millions): $188,000;
Total income tax (in millions): $3,022;
Average AGI per return (in whole dollars): $4,947;
Average income tax per return (in whole dollars): $80;
Income tax as a percentage of AGI: 1.8%.
Adjusted gross income (AGI): $15,000 under $30,000;
Number of taxable returns (in thousands): 30,229;
AGI (in millions): $669,932;
Total income tax (in millions): $22,211;
Average AGI per return (in whole dollars): $22,182;
Average income tax per return (in whole dollars): $735;
Income tax as a percentage of AGI: 3.3%.
Adjusted gross income (AGI): $30,000 under $50,000;
Number of taxable returns (in thousands): 25,978;
AGI (in millions): $1,015,283;
Total income tax (in millions): $61,398;
Average AGI per return (in whole dollars): $39,082;
Average income tax per return (in whole dollars): $2,383;
Income tax as a percentage of AGI: 8.0%.
Adjusted gross income (AGI): $50,000 under $100,000;
Number of taxable returns (in thousands): 31,280;
AGI (in millions): $2,218,021;
Total income tax (in millions): $191,293;
Average AGI per return (in whole dollars): $70,890;
Average income tax per return (in whole dollars): $8,119;
Income tax as a percentage of AGI: 8.8%.
Adjusted gross income (AGI): $100,000 under $200,000;
Number of taxable returns (in thousands): 13,483;
AGI (in millions): $1,793,835;
Total income tax (in millions): $229,415;
Average AGI per return (in whole dollars): $133,242;
Average income tax per return (in whole dollars): $17,040;
Income tax as a percentage of AGI: 12.8%.
Adjusted gross income (AGI): $200,000 under $250,000;
Number of taxable returns (in thousands): 1,501;
AGI (in millions): $333,309;
Total income tax (in millions): $58,802;
Average AGI per return (in whole dollars): $222,058;
Average income tax per return (in whole dollars): $37,843;
Income tax as a percentage of AGI: 17.0%.
Adjusted gross income (AGI): $250,000 or more;
Number of taxable returns (in thousands): 3,002;
AGI (in millions): $2,317,018;
Total income tax (in millions): $528,770;
Average AGI per return (in whole dollars): $771,824;
Average income tax per return (in whole dollars): $178,139;
Income tax as a percentage of AGI: 22.8%.
Totals:
Number of taxable returns (in thousands): 143,030;
AGI (in millions): $8,531,396;
Total income tax (in millions): $1,092,909.
(All figures are estimates and based on samples provided by the
Statistics of Income (S0I) Office).
[End of figure]
Figure: Individual Income Tax Liability As A Percentage Of AGI, Tax
Year 2007:
[Refer to PDF for image: vertical bar graph]
(All figures are estimates and based on samples provided by the
Statistics of Income (SOI Office).
Under $15,000:
$15,000 under $30,000:
$30,000 under $50,000:
$50,000 under $100,000:
$100,000 under $200,000:
$200,000 under $250,000:
$250,000 or more:
[data unavailable in text format]
Figure: Corporation Tax Liability As A Percentage Of Taxable Income,
Tax Year 2006 Data:
Total Assets (in thousands): Zero Assets;
Income subject to tax (in millions): $17,500;
Total income tax after credits (in millions): $5,399;
Percentage of income tax after credits to taxable income: 30.9%.
Total Assets (in thousands): $1 under $500;
Income subject to tax (in millions): $9,519;
Total income tax after credits (in millions): $1,787;
Percentage of income tax after credits to taxable income: 18.8%.
Total Assets (in thousands): $500 under $1,000;
Income subject to tax (in millions): $4,659;
Total income tax after credits (in millions): $1,123;
Percentage of income tax after credits to taxable income: 24.1%.
Total Assets (in thousands): $1,000 under $5,000;
Income subject to tax (in millions): $16,790;
Total income tax after credits (in millions): $4,933;
Percentage of income tax after credits to taxable income: 29.4%.
Total Assets (in thousands): $5,000 under $10,000;
Income subject to tax (in millions): $10,019;
Total income tax after credits (in millions): $3,286;
Percentage of income tax after credits to taxable income: 32.8%.
Total Assets (in thousands): $10,000 under $25,000;
Income subject to tax (in millions): $16,070;
Total income tax after credits (in millions): $5,321;
Percentage of income tax after credits to taxable income: 33.1%.
Total Assets (in thousands): $25,000 under $50,000;
Income subject to tax (in millions): $14,181;
Total income tax after credits (in millions): $4,661;
Percentage of income tax after credits to taxable income: 32.9%.
Total Assets (in thousands): $50,000 under $100,000;
Income subject to tax (in millions): $16,626;
Total income tax after credits (in millions): $5,457;
Percentage of income tax after credits to taxable income: 32.8%.
Total Assets (in thousands): $100,000 under $250,000;
Income subject to tax (in millions): $32,623;
Total income tax after credits (in millions): $10,431;
Percentage of income tax after credits to taxable income: 32.0%.
Total Assets (in thousands): $250,000 under $500,000;
Income subject to tax (in millions): $36,396;
Total income tax after credits (in millions): $11,531;
Percentage of income tax after credits to taxable income: 31.7%.
Total Assets (in thousands): $500,000 under $2,500,000;
Income subject to tax (in millions): $181,767;
Total income tax after credits (in millions): $54,367;
Percentage of income tax after credits to taxable income: 29.9%.
Total Assets (in thousands): $2,500,000 or more;
Income subject to tax (in millions): $935,281;
Total income tax after credits (in millions): $244,788;
Percentage of income tax after credits to taxable income: 26.2%.
Total Assets (in thousands):
Income subject to tax (in millions): $1,291,431;
Total income tax after credits (in millions): $353,084;
Percentage of income tax after credits to taxable income: 27.3%.
(All figures are estimates and based on samples provided by the
Statistics of Income (SOI) Office).
[End of section]
Appendix I: Material Weaknesses and Compliance Issues:
Material Weaknesses:
During our audits of the Internal Revenue Service's (IRS) fiscal years
2009 and 2008 financial statements, we identified two material
weaknesses[Footnote 20] in internal control. These material weaknesses
have given rise to significant management challenges that have (1)
impaired management's ability to prepare its balance sheet without
extensive compensating procedures, (2) limited the availability of
reliable information to assist management in effectively managing its
unpaid assessments on an ongoing basis, (3) resulted in errors in
taxpayer accounts that increased taxpayer burden, and (4) reduced
assurance that data processed by IRS's information systems are reliable
and appropriately protected. The issues that we have identified and
discuss in this report relate to IRS's internal control over (1) unpaid
tax assessments and (2) information security. We reported on each of
these issues last year[Footnote 21] and in prior audits. We highlight
these issues in the following sections.
In previous years, we reported a material weakness in IRS's internal
control over financial reporting. IRS has worked steadily over a number
of years to address several deficiencies that constituted this material
weakness and has made steady progress. During fiscal year 2009, IRS (1)
continued to develop its ability to provide managerial cost accounting
information and developed full cost data on several programs and (2)
substantially completed developing the capability to trace its revenue
and refund transactions from its general ledger to supporting detailed
transaction information, thus providing full transaction traceability
of its tax refunds and more than 98 percent of its tax revenue
collections. Based on IRS's progress, we no longer consider the
remaining issues to represent a material weakness in internal control.
While we no longer consider the remaining issues related to IRS's
development and use of cost accounting to be an internal control
deficiency, they continue to present IRS with significant operational
and financial management challenges requiring further attention.
Additionally, IRS's core financial system for unpaid tax assessments
and other tax related transactions, the Interim Revenue Accounting
Control System (IRACS), continued to be noncompliant with the U.S.
Government Standard General Ledger (SGL) at the transaction level, and
this system and its related subsidiary records continued to be unable
to provide the capability to trace transactions related to taxes
receivable and other unpaid assessments. We have therefore included
this deficiency as a component of the material weakness in internal
control over unpaid assessments in fiscal year 2009.
Unpaid Tax Assessments:
During fiscal year 2009, we continued to find serious internal control
issues that affected IRS's management of unpaid tax assessments.
Specifically, we continued to find (1) IRS's reported balances for
taxes receivable and other unpaid assessments[Footnote 22] were not
supported by its core general ledger system for tax administration--
related transactions (IRACS), (2) IRS lacked a subsidiary ledger for
unpaid tax assessments that would allow it to produce reliable, useful,
and timely information with which to manage and report externally, and
(3) IRS experienced errors and delays in recording taxpayer
information, payments, and other activities.
As we reported in prior years,[Footnote 23] IRS's balance for federal
taxes receivable,[Footnote 24] which comprised nearly 80 percent of
IRS's total assets as reported on its fiscal year 2009 balance sheet,
was not produced by IRACS. IRS's master files[Footnote 25] and IRACS
were not designed to classify and report unpaid assessments in
accordance with federal accounting standards. To compensate for this,
IRS must apply statistical sampling and estimation techniques to data
from its master files to estimate the year-end balances of (1) taxes
receivable in its financial statements and required supplementary
information and (2) compliance assessments and write-offs in its
required supplementary information. While IRS reports the taxes
receivable balance derived from this process on its balance sheet, and
the balances of compliance assessments and write-offs in its required
supplementary information, it does not record these amounts into IRACS
because they are the product of an annual statistical estimation
process rather than a summation of taxpayer account transaction data.
As a result, IRS does not have records to trace transactions from the
taxes receivable amount and other unpaid assessment amounts reported on
IRS's financial statements, through its general ledger system, and back
to underlying transaction-level taxpayer source documents. Such
traceability is necessary to enable IRS to ensure that recorded
transactions are complete, accurate, and supported by underlying
records. Consequently, IRACS does not substantially comply with the
U.S. Government Standard General Ledger (SGL) at the transaction level,
and Federal Financial Management Systems Requirements (FFMSR) embodied
in OMB Circular No. A-127, Financial Management Systems.[Footnote 26]
Recognizing the seriousness of this deficiency, IRS began phasing in
the use of the Custodial Detail Data Base (CDDB) in 2006. One key
objective of CDDB is to serve as a transaction-level subsidiary ledger
for unpaid tax assessments by linking and classifying taxpayer account
information from IRS's master files to IRACS, thus providing the
transactional traceability. In fiscal year 2008, IRS enhanced CDDB to
weekly analyze and record unpaid assessments balances from its master
file, including related interest and penalty accruals, to its general
ledger by the various financial reporting categories (taxes receivable,
compliance assessments, and write-offs). These enhancements established
CDDB's capability to function as a transaction-level subsidiary ledger
for unpaid tax debt.
However, IRS cannot yet use CDDB as its subsidiary ledger for recording
transaction-based tax debt information to its general ledger in a
manner that ensures reliable internal and external reporting. While
CDDB analyzes and classifies master file tax debt information into the
various financial reporting categories, the analysis and classification
contained material inaccuracies. For example, through its use of its
statistical sampling and estimation techniques, IRS identified errors
necessitating almost $8 billion in adjustments to the 2009 fiscal year-
end gross taxes receivable balance produced by CDDB. Accordingly, IRS
must continue to use a statistical sampling and estimation technique in
order to derive reliable amounts for taxes receivable and other unpaid
assessments categories for internal and external reporting. While the
use of CDDB has refined this process, it continued to take IRS several
months to complete, required multibillion-dollar adjustments, and
produced amounts that were only reliable as of the last day of the
fiscal year. Consequently, the lack of an effective transaction-level
subsidiary ledger continues to inhibit IRS's ability to timely develop
reliable financial and management reports useful for ongoing management
decisions and external reporting in accordance with federal accounting
standards.
During our fiscal year 2009 audit, we identified several systemic
limitations in the programs used by CDDB that resulted in
misclassifying tax debt accounts among the three financial reporting
categories--taxes receivable, compliance assessments, and write-offs.
We identified instances in which CDDB was unable to correctly classify
an account module.[Footnote 27] Specifically, IRS had not written
sufficient details into the CDDB classification program to allow it to
sort through, identify, and analyze all the relevant transaction-level
information required for proper classification. For example, when IRS
records multiple tax assessments on a single account module, CDDB is
currently unable to distinguish among and separately classify the
various balances. In one instance we identified, a taxpayer filed a tax
return but did not pay the entire amount of the tax liability reported
on the return, which resulted in the amount owed being classified as a
tax receivable.[Footnote 28] IRS later assessed additional taxes
against the taxpayer for the same tax period through its Automated
Underreporter program,[Footnote 29] but the taxpayer did not concur
with the additional tax assessment. The additional assessment should
have been classified as a compliance assessment.[Footnote 30] However,
CDDB classified the entire outstanding balance as taxes receivable
because the taxpayer's master file account module contained information
that the taxpayer had filed a tax return.
In another example, CDDB was unable to analyze and properly classify
related account modules associated with unpaid payroll taxes if IRS (1)
assessed a trust fund recovery penalty (TFRP) against the officer of a
business for a specific tax period and (2) assessed the same individual
a TFRP from a different business for the same tax period.[Footnote 31]
IRS assessed a TFRP against an officer related to a defunct business's
unpaid payroll taxes for a particular tax period. [Footnote 32] The
business had filed a tax return reporting the unpaid payroll taxes for
the period. However, since the business was defunct, IRS's only
recourse was to pursue collection on the TFRP that it assessed against
the officer. In this situation, CDDB should have (1) classified the
outstanding TFRP against the officer as taxes receivable, (2)
classified a like amount of the business's outstanding payroll tax as a
duplicate assessment that is not counted for financial reporting
purposes, and (3) classified any remaining balance from the business's
unpaid payroll tax account that is above the TFRP amount as a write-
off. However, in this case, IRS had also assessed this same individual
a TFRP related to another business for the same tax period. Because
there were two separate TFRP assessments recorded on the individual's
master file account module for the same tax period, CDDB was unable to
process and correctly classify the related account modules. As a
result, CDDB defaulted to classifying the business's outstanding
payroll tax account as taxes receivable and classifying the
individual's TFRP account as a duplicate assessment. Since the business
was defunct and the amount of the payroll tax owed by the business was
more than the amount of the TFRP assessment against the individual,
this overstated the taxes receivable balance. Consequently, IRS had to
make an adjustment to reduce the balance of taxes receivable on this
account.
In addition to CDDB's systemic limitations, IRS's management and
reporting of unpaid tax assessments also continued to be hindered by
inaccurate tax records. During our fiscal year 2009 audit, we again
found errors in taxpayer records resulting from IRS's not recording
information accurately and timely. Such errors directly affect the
accuracy of the tax debt information being classified by CDDB.
Additionally, such errors can cause frustration to taxpayers who either
have already paid taxes owed or who owe significantly lower amounts.
For example, in one case we reviewed, a taxpayer submitted a gift tax
return with an associated payment of approximately $3 million in fiscal
year 2009. IRS recorded the tax return information in the taxpayer's
master file account module but failed to record the receipt of the
payment. This created a balance due within the account and led to IRS
issuing two notices to the taxpayer requesting payment for an amount
that had already been paid. Although IRS subsequently found and
recorded the taxpayer's payment, it did so only after inconveniencing
the taxpayer. In another case, IRS accepted a business's offer-in-
compromise[Footnote 33] in April 2002 but did not record this
information on the business's master file account module. Instead, IRS
only recorded the submission of the offer, which suspended the
automated countdown to the expiration date of the statutory collection
period[Footnote 34] for the outstanding tax debt on the master file
record. Because the taxpayer did not satisfy all the conditions of its
offer, IRS did not abate the balance of the outstanding tax debt.
[Footnote 35] If IRS had recorded the acceptance of the offer in 2002,
the countdown of the statutory collection period would have resumed and
the taxpayer's account module would have been removed from IRS's
systems when the statutory collection period expired in May 2008.
Instead, as a result of IRS's processing error, the taxpayer's account
balance was erroneously included in IRS's inventory of unpaid
assessments during fiscal year 2009.
We again continued to find errors involving IRS's failure to properly
record payments to all related taxpayer accounts associated with unpaid
payroll taxes. As in prior years,[Footnote 36] IRS's systems are unable
to automatically reflect a reduction in the amounts owed on the related
accounts when the business or any officer of that business pays some or
all of the outstanding taxes. Although IRS has made improvements in its
processes for recording TFRPs over the last several years, our work in
fiscal year 2009 continued to find deficiencies in this process,
leading to errors in taxpayers' accounts. In our testing of 92
statistically selected payments received in the first 3 months of
fiscal year 2009 that were recorded on TFRP accounts, we found 8
instances in which IRS did not properly record payments received on all
related taxpayer accounts. Based on our testing, we estimate that about
8.7 percent of TFRP payment transactions in the first 3 months of
fiscal year 2009 that were posted on TFRP accounts could contain
inaccuracies.[Footnote 37]
Furthermore, processing errors contributed to IRS's inability to timely
release federal tax liens against taxpayers who have fully satisfied or
are otherwise relieved of their tax liability. Such errors delayed the
recording of taxpayers' satisfying payments, resulting not only in
inaccurate tax records but also delays in IRS's release of federal tax
liens. This, in turn, causes undue burden to taxpayers who are
attempting to sell property or apply for commercial credit.[Footnote
38]
Current systemic limitations and processing errors that caused
inaccurate tax records resulted in IRS having to make numerous
adjustments as part of its process for estimating the balance of net
taxes receivable and other unpaid tax assessments. When IRS identified
misclassified cases resulting from systemic limitations and errors
similar to those described above when reviewing its sample of unpaid
assessment cases, it recorded adjustments to the affected account to
reflect the correct value of that account at the point in time that IRS
sampled the account information. On the basis of a statistical
projection of these individual adjustments, IRS had to make
multibillion-dollar adjustments to the year-end balances of all three
categories of unpaid assessments generated by CDDB in order to produce
reliable amounts for external reporting on its balance sheet and
required supplementary information. Absent the use of this statistical
estimation process, the various unpaid assessment balances produced by
CDDB would have been materially inaccurate.
The progress IRS has made to date with using CDDB data is an important
step in moving toward a fully functioning subsidiary ledger that could
provide for full traceability of detailed transaction information to
the general ledger with respect to taxes receivable and the other
unpaid tax assessments categories. Using unadjusted CDDB information to
support the general ledger for the external reporting of taxes
receivable and the other unpaid assessments categories would move IRS
towards compliance with the SGL and FFMSR.[Footnote 39] However, IRS
must fully address the issues that cause material inaccuracies in the
unpaid assessments information produced by CDDB before it can rely on
unadjusted CDDB data for financial reporting. This will require further
enhancements to CDDB to enable it to more accurately distinguish
between the three categories of unpaid tax assessments so that reliable
transaction-based balances for each are ultimately recorded in the
general ledger.
Information Security:
IRS has demanding responsibilities in collecting taxes, processing tax
returns, and enforcing the nation's tax laws, and relies extensively on
computerized systems to support its financial and mission-related
operations. Ensuring that taxpayer and financial information is
adequately protected from inadvertent or deliberate misuse, fraudulent
use, and improper disclosure, modification, or destruction requires
effective information system controls. Further, ineffective information
system controls can impair the accuracy, completeness, and timeliness
of information used by management and, in the absence of effective
compensating procedures, increase the potential for undetected material
misstatements in the agency's financial statements.
During fiscal year 2009, IRS made progress in addressing numerous
information security weaknesses we identified in previous audits. For
example, IRS (1) documented approved access privileges for its
mainframe user groups, (2) implemented role-based access controls to
reduce the number of users with special privileged access on the system
supporting the Integrated Financial System (IFS),[Footnote 40] and (3)
changed vendor-supplied database accounts and passwords to avoid
potential use by malicious users.
Despite these actions, previously identified weaknesses in internal
control over information security continue to place IRS systems at
risk. For example, for its procurement system, IRS had not restricted
users' ability to bypass application controls, and was not removing
separated employees' access in a timely manner. Further, managers did
not always follow required procedures to timely review employee access
to sensitive areas at data centers to ensure that access was limited
only to employees who needed it to perform their jobs. These unresolved
weaknesses increase the risk that data processed by the agency's
financial management systems are not reliable.
During our fiscal year 2009 audit, we identified additional significant
weaknesses in internal control over information security that, along
with previously identified weaknesses, continued to jeopardize the
confidentiality, availability, and integrity of information processed
by IRS's key systems, increasing the risk of material misstatement for
financial reporting. For example, the operating system software
supporting IFS has reached its "end of service" life.[Footnote 41] As a
result, IRS may receive limited or no vendor maintenance support and
security patches, thus increasing the risk that known information
security vulnerabilities may be exploited. Also, about 120 IRS
employees had access to key documents, including cost data for input to
IFS and a critical process-control spreadsheet used in IRS's cost
allocation process. However, fewer than 10 employees needed access to
perform their jobs. The large number of employees with access to these
documents increases the chances that they may intentionally or
unintentionally corrupt the data in these documents, which could result
in incorrect input and processing, or both, thus jeopardizing the
accuracy of the cost allocation output. In addition, IRS used weak
encryption controls for user login to IFS servers, increasing the risk
that user IDs and passwords could be used for malicious intent.
Further, IRS was not always logging and auditing security-relevant
events on its procurement system; this increased the risk that IRS may
not be able to detect unauthorized access. Additionally, IRS had not
always ensured it had appropriate separation of duties for its
procurement system, as one individual was performing the roles of
system and database administrators--critical functions that should be
performed by separate individuals or groups. IRS used vulnerable
software on key servers, exposing the organization to a vulnerability
that could allow a malicious user to capture user IDs and passwords by
redirecting internal users' access requests to other systems without
their knowledge.
The weaknesses in IRS's financial systems are due in part to IRS's not
fully implementing its information security program[Footnote 42] to
ensure that controls are effectively established and maintained. IRS
has developed and documented its program, but it has not fully or
consistently implemented program requirements for key information
systems. For example, although IRS has developed and implemented a
process to address deficiencies in its information security policies,
procedures, and practices, it did not sufficiently verify whether
remedial actions were implemented or effective in mitigating the
vulnerability. To illustrate, IRS informed us that it had corrected
about 40 percent of the previously reported weaknesses. However, we
found that IRS had not fully implemented the remedial actions it
reported for at least a third of those that IRS considered corrected.
Until IRS takes additional steps to fully implement key elements of its
information security program, such as improving its remedial action
process and ensuring employee adherence to its security-related
policies and procedures, its facilities, computing resources, and
information will remain vulnerable to inappropriate use, modification,
or disclosure, and agency management will have limited assurance of the
integrity and reliability of its financial and taxpayer information.
Collectively, the newly identified deficiencies in fiscal year 2009 and
the unresolved deficiencies from prior audits reduce IRS's ability to
ensure that its financial and taxpayer information is secure and, in
the absence of effective compensating procedures, increase the
potential for undetected material misstatements in the agency's
financial statements. We plan to issue a separate report on the
deficiencies identified during fiscal year 2009 and the status of
previously identified deficiencies.
To address its information security weaknesses, IRS has various
initiatives underway. IRS has developed and documented a detailed
roadmap to guide its efforts in targeting critical weaknesses. The
agency is also in the process of implementing a comprehensive plan to
address numerous information security weaknesses, such as those
associated with network and system access, audit trails, system
software configuration, and contingency planning. According to the
plan, the last of these weaknesses is scheduled to be resolved in the
first quarter of fiscal year 2014. Additionally, IRS has targeted
initiatives covering identity and access management, auditing and
monitoring, and disaster recovery for fiscal year 2010. These efforts,
if fully and effectively implemented, are positive steps towards
improving the agency's overall information security posture.
Compliance Issues:
Our tests of IRS's compliance with selected provisions of laws and
regulations disclosed one instance of noncompliance that is reportable
under U.S. generally accepted government auditing standards. This
instance relates to the release of federal tax liens against taxpayers'
property. We also found that IRS's financial management systems do not
substantially comply with the requirements of the Federal Financial
Management Improvement Act of 1996 (FFMIA).
Release of Federal Tax Liens:
The Internal Revenue Code 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.[Footnote 43] The lien serves to protect
the interest of the federal government and 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 Internal
Revenue Code, IRS is required to release federal tax liens 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 prior audits, we found that IRS did not always release the
applicable federal tax lien within 30 days of the tax liability being
either paid off or abated, as required by the Internal Revenue Code.
[Footnote 44] In response, IRS has taken a number of actions over the
past several years to improve its lien processing. For example, IRS
centralized all lien processing at its Cincinnati Service Center Campus
in 2005. In addition, in July 2006, IRS enhanced various lien
processing-related exception reports to include a cumulative list of
unresolved lien releases, allowing it to more readily track the release
status and take corrective action.
Despite the actions IRS has taken to date to improve its lien release
process, our work in fiscal year 2009 continued to find that IRS did
not always timely release all tax liens where the taxpayer had paid in
full or was otherwise relieved of a tax liability. In prior audits, we
tested a statistical sample of tax cases with liens in which the
taxpayers' total outstanding tax liabilities were either paid off or
abated during the fiscal year under audit. Beginning in fiscal year
2006, IRS began performing its own test of the effectiveness of its
lien release process as part of implementing the requirements of the
revised OMB Circular No. A-123[Footnote 45] and we reviewed its test
results.
In our review and validation of IRS's testing of 59 statistically
selected tax cases with liens in which the taxpayers' total outstanding
tax liabilities were either paid off or abated during fiscal year 2009,
we noted that IRS's testing identified 8 instances in which it did not
release the applicable federal tax lien within the statutorily mandated
30 days. The time between satisfaction of the liability and release of
the lien ranged from 35 days to more than 123 days. On the basis of the
sample, IRS did not release the lien within 30 days[Footnote 46] for an
estimated 14 percent of unpaid tax assessment cases resolved in fiscal
year 2009 for which it had filed a tax lien.
Various IRS processing errors and delays resulted in IRS not releasing
these liens timely. These issues are similar to those we reported in
prior audits.[Footnote 47] We previously issued a report that discussed
factors contributing to IRS's failure to timely release federal tax
liens and made recommendations to address those issues.[Footnote 48]
IRS has not yet completed actions to fully address all of these
recommendations. Until IRS addresses the deficiencies we previously
reported, as well as those it has identified through its own testing,
IRS will not be able to ensure the timely release of liens. The
continued 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.
Financial Management Systems' Noncompliance with FFMIA:
In fiscal year 2009, we continued to find that IRS's financial
management systems did not substantially comply with FFMIA
requirements. Specifically, IRS's systems did not substantially comply
with FFMSR, federal accounting standards (U.S. generally accepted
accounting principles), and the SGL at the transaction level. In its
fiscal year 2009 Federal Managers' Financial Integrity Act of 1982
assurance statement to the Department of the Treasury, IRS also
reported that its financial management systems did not substantially
comply with FFMIA requirements.
IRS's core general ledger system for tax-related activities, IRACS,
does not conform to the requirements of FFMSR, which are contained in
OMB Circular No. A-127,[Footnote 49] and also does not comply with the
SGL at the transaction level. Specifically, as we noted earlier in this
report, IRS continues to lack transaction traceability for taxes
receivable, which in fiscal year 2009 was again the product of a
complex statistical estimation process and was not recorded in IRACS,
although it accounted for nearly 80 percent of the assets reported by
IRS on its balance sheet as of September 30, 2009. IRACS also does not
post transactions in conformance with SGL posting models. Also, as
discussed previously, material weaknesses in IRS's internal control
over information security continue to threaten the (1) integrity of the
financial statements and the accuracy and availability of financial
information needed to support day-to-day decision making and (2)
confidentiality of proprietary information. In fiscal year 2009, we
continued to identify weaknesses in controls for protecting access to
systems and information, as well as weaknesses in other information
security controls that affect IRS's key financial systems, specifically
IFS. As discussed earlier, a key reason for the presence of these
information security weaknesses in IRS's financial systems is that IRS
has not yet fully implemented a security program to ensure that
controls are effectively established and maintained.
IRS is in the process of implementing a significant enhancement to
IRACS that it expects will bring this system into full conformance with
the requirements of the SGL. This enhanced system, referred to as the
Redesign Revenue Accounting and Control System (RRACS), is scheduled to
become fully operational in February 2010. We will assess the SGL
conformance of RRACS during our audit of IRS's fiscal years 2010 and
2009 financial statements.
IRS's financial management systems did not substantially comply with
federal accounting standards in fiscal year 2009 because (1) IRS's
automated systems for tax related transactions did not support the net
taxes receivable amount on IRS's balance sheet and other required
supplemental information related to uncollected taxes--compliance
assessments, and write-offs--in accordance with Statement of Federal
Financial Accounting Standards No. 7, Accounting for Revenue and Other
Financing Sources and Concepts for Reconciling Budgetary and Financial
Accounting. To compensate, IRS relied on a complex statistical sampling
process to estimate these amounts, and (2) IRS had two material
weaknesses in its internal control.
IRS has established a remediation plan to address the conditions that
lead to its systems' substantial noncompliance with the FFMIA
requirements. This plan outlines the actions to be taken to resolve
these issues, many of which are long-term in nature and are tied to
IRS's systems modernization efforts.[Footnote 50]
[End of section]
Appendix II: Management's Report on Internal Control over Financial
Reporting:
Department Of The Treasury:
Commissioner:
Internal Revenue Service:
Washington, D.C. 20224:
November 5, 2009:
Mr. Steven J. Sebastian:
Director, Financial Management and Assurance:
U.S. Government Accountability Office:
441 G Street, N.W.
Room 5474:
Washington, DC 20548:
Dear Mr. Sebastian:
The Internal Revenue Service (IRS) internal control over financial
reporting is a process affected by those charged with governance,
management, and other personnel, the objectives of which are to provide
reasonable assurance that (1) transactions are properly recorded,
processed and summarized to permit the preparation of financial
statements in accordance with U.S. generally accepted accounting
principles, and assets are safeguarded against loss from unauthorized
acquisition, use, or disposition; and (2) transactions are executed in
accordance with the laws governing the use of budget authority and
other laws and regulations that could have a direct and material effect
on the financial statements.
IRS management is responsible for establishing and maintaining
effective internal control over financial reporting. IRS management
evaluated the effectiveness of IRS internal control over financial
reporting as of September 30, 2009, based on the criteria established
under 31 U.S.C. 3512, commonly known as the Federal Managers' Financial
Integrity Act (FMFIA).
Based on our evaluation, IRS has two material weaknesses in its
internal control over financial reporting, specifically (1) unpaid tax
assessments and (2) information security. IRS financial management
systems do not substantially comply with the requirements of the
Federal Financial Management Improvement Act (FFMIA). On this basis,
management provides qualified assurance that as of September 30, 2009,
IRS internal control over financial reporting was effective.
Signed by:
Douglas H. Shulman:
Commissioner:
November 5, 2009:
Signed by:
Alison L. Doone:
Chief Financial Officer:
[End of section]
Appendix III: Comments from the Internal Revenue Service:
Department Of The Treasury:
Commissioner:
Internal Revenue Service:
Washington, D.C. 20224:
November 5, 2009:
Mr. Steven J. Sebastian:
Director:
Financial Management and Assurance:
U.S. Government Accountability Office:
441 G Street, N.W.
Washington, D.C. 20548:
Dear Mr. Sebastian:
Thank you for the opportunity to comment on the draft report titled,
Financial Audit: IRS's Fiscal Years 2009 and 2008 Financial Statements.
We are pleased that the Internal Revenue Service (IRS) received an
unqualified opinion on the combined financial statements for the tenth
consecutive year. The unqualified opinion demonstrates that the IRS
accurately accounts for approximately $2.3 trillion in tax revenue
receipts, $438 billion in tax refunds, and $12 billion in IRS
appropriated funds.
We also are pleased that the Government Accountability Office (GAO)
recognizes the significant accomplishments the IRS made this year in
addressing its financial management challenges and material weaknesses
in internal controls. As a result of the IRS progress, GAO no longer
considers the remaining issues over financial reporting to constitute a
material weakness. Further, GAO concluded that the remaining issues
regarding tax revenue and refunds no longer constitute a significant
deficiency.
We are dedicated to continuing to improve financial management at the
IRS, as evidenced by the following additional FY 2009 achievements:
* Conducted A-123 activities by testing transaction processes material
to Treasury's Consolidated Financial Statements, including 16
administrative processes related to $12 billion in administrative
transactions and three custodial tax processes related to $2.3 trillion
in tax revenues.
* Established the Custodial Detail Database (CDDB) as the subsidiary
ledger to the Interim Revenue Accounting Control System (IRACS) for
revenue and refunds, including traceability of 98% of all revenue
receipts to the detailed taxpayer transactions.
* Enhanced financial management structure and processes to provide key
management data on costs and enforcement tax revenue by publishing an
IRS-wide Cost Accounting Manual and developing a plan to standardize
the use of cost-based measures.
* Ensured the continuity and resiliency of critical business processing
systems by completing the development of disaster recovery plans for
all General Support Systems.
Improving information security continues to be a priority for the IRS.
During FY 2009 the IRS made notable accomplishments in this area.
Specifically, we increased the security of IRACS, the Integrated
Financial System, and the Treasury Information Executive Repository
environment, by limiting access to a reduced number of authorized
staff. IRS also instituted role-based access in financial management
systems and implemented controls to enforce the use of strong passwords
in accordance with the Internal Revenue Manual.
I want to recognize GAO's support throughout the audit. While
challenges remain, the IRS has established its ability to consistently
produce accurate and reliable financial statements. We have a solid
management team dedicated to promoting the highest standard of
financial management, and we continue to increase the focus on
information security and internal controls while improving financial
reporting.
Sincerely,
Signed by:
Douglas H. Shulman:
[End of section]
Footnotes:
[1] A material weakness is a deficiency, or a combination of
deficiencies, in internal control such that there is a reasonable
possibility that a material misstatement of the entity's financial
statements will not be prevented, or detected and corrected on a timely
basis.
[2] A significant deficiency is a deficiency, or a combination of
deficiencies, in internal control that is less severe than a material
weakness, yet important enough to merit attention by those charged with
governance.
[3] The term enforcement revenue refers to the tax revenue received as
a result of IRS's tax collection actions--enforcement--taken against
taxpayers who do not voluntarily pay their taxes when due.
[4] See the CFO Act of 1990, Pub. L. No. 101-576, 104 Stat. 2838 (Nov.
15, 1990), codified in relevant part, as amended, at 31 U.S.C. §
3521(g). Under the authority of 31 U.S.C. § 3515, the Office of
management and Budget requires IRS to issue separate annual audited
financial statements.
[5] IRS includes an estimate of the tax gap in the other accompanying
information to the financial statements. This estimate is based on a
study conducted to measure the compliance rate of individual filers
based on an examination of a statistical sample of tax returns filed
for tax year 2001.
[6] Tax expenditures are revenue losses--the amount of revenue that the
government forgoes--resulting from federal tax law provisions that (1)
allow a special exclusion, exemption, or deduction from gross income,
or (2) provide a special credit, preferential rate, or deferred tax
liability. Under U.S. generally accepted accounting principles, tax
expenditure amounts are not required to be disclosed as part of federal
agencies' financial statements, but certain information on tax
expenditures can be included as other accompanying information to the
financial statements.
[7] Pub. L. No. 104-208, div. A, § 101(f), title VIII, 110 Stat. 3009,
3009-389 (Sept. 30, 1996).
[8] GAO, Financial Audit: IRS's Fiscal Years 2008 and 2007 Financial
Statements, [hyperlink, http://www.gao.gov/products/GAO-09-119]
(Washington, D.C.: Nov. 10, 2008).
[9] A material weakness is a deficiency, or a combination of
deficiencies, in internal control such that there is a reasonable
possibility that a material misstatement of the entity's financial
statements will not be prevented, or detected and corrected on a timely
basis.
[10] A significant deficiency is a deficiency, or a combination of
deficiencies, in internal control that is less severe than a material
weakness, yet important enough to merit attention by those charged with
governance.
[11] IRS continues to face difficulty with the traceability of certain
transactions related to unpaid tax assessments, which we discuss in the
section of this report on the material weakness in internal control
over unpaid assessments.
[12] An unpaid assessment is a legally enforceable claim against a
taxpayer and consists of taxes, penalties, and interest that have not
been collected or abated (a reduction in a tax assessment).
[13] Federal accounting standards classify unpaid assessments into one
of the following three categories for reporting purposes: federal taxes
receivables, compliance assessments, and write-offs. Federal taxes
receivable are taxes due from taxpayers for which IRS can support the
existence of a receivable through taxpayer agreement or a favorable
court ruling. Compliance assessments are assessments where neither the
taxpayer nor the court has affirmed that the amounts are owed. Write-
offs represent unpaid tax assessments for which IRS does not expect
further collections because of factors such as the taxpayer's death,
bankruptcy, or insolvency. Of these three classifications of unpaid tax
assessments, only net federal taxes receivable are reported on the
financial statements.
[14] See Government Paperwork Elimination Act, Pub. L. No. 105-277,
div. C, tit. XVII, 112 Stat. 2681, 2681-749 (Oct. 21, 1998) (codified
at 44 U.S.C. § 3504); see also 65 Fed. Reg. 25,508 (May 2, 2000), and
OMB procedures and guidance to implement the Government Paperwork
Elimination Act.
[15] FASAB Statement of Federal Financial Accounting Concept 1:
Objectives of Federal Financial Reporting, version 7 (Washington, D.C.:
June 30, 2008).
[16] The "full cost" of a program or activity includes all the direct
costs, including personnel time charges, and indirect costs, such as
the allocation of overhead costs, that are applicable to the program or
activity.
[17] GAO, Internal Revenue Service: Status of GAO Financial Audit and
Related Financial Management Report Recommendations, [hyperlink,
http://www.gao.gov/products/GAO-09-514] (Washington, D.C.: June 25,
2009).
[18] Tax law requires IRS 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. 26 U.S.C. § 6325(a).
[19] Pub. L. No. 104-208, div. A, § 101(f), title VIII, 110 Stat. 3009,
3009-389 (Sept. 30, 1996).
[20] A material weakness is a deficiency, or a combination of
deficiencies, in internal control such that there is a reasonable
possibility that a material misstatement of the entity's financial
statements will not be prevented, or detected and corrected on a timely
basis.
[21] GAO, Financial Audit: IRS's Fiscal Years 2008 and 2007 Financial
Statements, [hyperlink, http://www.gao.gov/products/GAO-09-119]
(Washington, D.C.: Nov. 10, 2008).
[22] Federal accounting standards classify unpaid assessments into one
of the following three categories for reporting purposes: federal taxes
receivable, compliance assessments, and write-offs. Federal taxes
receivable are taxes due from taxpayers for which IRS can support the
existence of a receivable through taxpayer agreement or a favorable
court ruling. Compliance assessments are assessments where neither the
taxpayer nor the court has affirmed that the amounts are owed. Write-
offs represent unpaid tax assessments for which IRS does not expect
further collections because of factors such as the taxpayer's death,
bankruptcy, or insolvency. Of these three classifications of unpaid tax
assessments, only net federal taxes receivable are reported on the
financial statements.
[23] [hyperlink, http://www.gao.gov/products/GAO-09-119].
[24] IRS reports federal taxes receivable on its balance sheet, net of
an allowance for amounts considered uncollectible.
[25] IRS's master files contain detailed records of taxpayer accounts.
However, the master files do not contain all the details necessary to
properly classify or estimate collectibility for unpaid tax assessment
accounts.
[26] OMB, Circular No. A-127, Financial Management Systems (Washington,
D.C.: Dec. 1, 2004). FFMSR require application of the SGL at the
transaction level and state that conformance requires, among other
items, that transaction detail for SGL accounts be readily available in
the financial management system and be traceable to specific SGL
account codes.
[27] A taxpayer may have multiple account modules within IRS's master
files under a unique taxpayer identification number (i.e., social
security number or an employer identification number). Each unique
account module is identified by the taxpayer identification number,
specific tax period (e.g., year, quarter), and tax type (e.g., excise
tax, individual tax, payroll tax, etc.).
[28] According to federal accounting standards, the self-reporting of
an outstanding tax liability establishes the outstanding balance as a
tax receivable for financial reporting purposes.
[29] Automated Underreporter is an IRS program that compares
information on tax returns to related information submitted
electronically by third parties to identify potential unreported
taxable income.
[30] According to federal accounting standards, outstanding tax
liabilities are to be classified as compliance assessments when there
is no evidence that the taxpayer agreed with the tax assessment, and
there is a court order in favor of IRS's assessment.
[31] When a business willfully fails to collect, account for, or pay
the taxes it is legally required to withhold from its employees' wages,
such as Social Security or individual income tax withholdings (what is
commonly referred to as "trust fund taxes"), IRS assesses underpayment
penalties against the business and may impose an additional trust fund
recovery penalty (TFRP) against the responsible officers. Although IRS
has the authority to assess the TFRP individually against all
responsible officers, the full amount of the TFRP need only be paid
once. Thus, IRS may record tax assessments against each of several
individuals for the employee-withholding component of the payroll tax
liability of a given business in an effort to collect the total tax
liability of the company. See 26 U.S.C. § 6672 and implementing
guidance for IRS policy in the Internal Revenue Manual at § 4.23.9.13,
Trust Fund Recovery Penalty (May 14, 2008).
[32] A defunct business is one that is no longer operating and does not
have any assets IRS can levy to pay off some or all of the business's
outstanding tax debt.
[33] An offer-in-compromise is an agreement between a taxpayer and IRS
that resolves the taxpayer's tax debt by accepting less than full
payment. See 26 U.S.C. § 7122, 26 C.F.R. § 601.203.
[34] IRS has a statutory limitation on the length of time it can pursue
unpaid taxes, generally 10 years from the date of the tax assessment.
See 26 U.S.C. § 6502.
[35] Abatements are reductions in tax assessments and are a normal part
of IRS's tax administration process. Abatements may occur for a number
of reasons. For example, a taxpayer may file an amended return claiming
a lower tax liability than previously reported or a qualifying
corporation may claim a net operating loss which created a credit that
can be carried back to reduce a prior year's tax liability.
[36] [hyperlink, http://www.gao.gov/products/GAO-09-119].
[37] We are 95 percent confident that the error rate does not exceed
15.1 percent.
[38] This issue is discussed further in the Compliance Issues section
of this report.
[39] This issue is discussed further in the Compliance Issues section
of this report.
[40] IFS is IRS's administrative accounting system, which IRS uses to
facilitate its core financial management activities, including general
ledger, budget formulation, accounts payable, accounts receivable,
funds management, cost management, and financial reporting.
[41] A vendor will typically make support available to a buyer for a
number of years after the product is shipped. However, after the
product has reached its "end of service" life, the buyer will not
receive patches, including security patches, unless it purchases
additional services.
[42] In December 2002, Congress enacted the Federal Information
Security Management Act of 2002 (FISMA), which requires agencies to
develop, document, and implement an information security program. FISMA
was enacted as title III of the E-Government Act of 2002, Pub. L. No.
107-347, 116 Stat. 2946 (Dec. 17, 2002). The agency information
security program requirement is codified at 44 U.S.C. § 3544(b).
[43] 26 U.S.C. §§ 6321, 6323.
[44] [hyperlink, http://www.gao.gov/products/GAO-09-119].
[45] OMB's revised Circular No. A-123, Management's Responsibility for
Internal Control, became effective on October 1, 2005. Appendix A to
OMB Circular No. A-123 provides internal control guidance and
requirements for executive branch agencies to follow in conducting
management's assessment of the effectiveness of internal control over
financial reporting. On the basis of this assessment, agency management
is required to prepare an assurance statement on the effectiveness of
internal control over financial reporting to be included in its
performance and accountability report. These requirements are
applicable to the 24 Chief Financial Officers Act agencies, including
the Department of the Treasury, of which IRS is a significant
component.
[46] IRS reports it is 95 percent confident that the percentage of
cases in which the lien was not released within 30 days does not exceed
23 percent.
[47] [hyperlink, http://www.gao.gov/products/GAO-09-119].
[48] GAO, Management Report: Improvements Needed in IRS's Internal
Controls, [hyperlink, http://www.gao.gov/products/GAO-07-689R]
(Washington, D.C.: May 11, 2007).
[49] OMB, Circular A-127, Financial Management Systems (Washington,
D.C.: Dec. 1, 2004). FFMSR requires application of the SGL at the
transaction level and states that conformance requires, among other
items, that transaction detail for SGL accounts be readily available in
the financial management system and be traceable to specific SGL
account codes. In January 2009, OMB revised Circular No. A-127,
effective October 1, 2009. The revised circular changed the
requirements concerning how agencies determine their compliance with
FFMIA.
[50] Section 803(c)(4) of FFMIA requires that Treasury, with the
concurrence of the Director of OMB, specify the most feasible date for
bringing its systems into substantial compliance with the three FFMIA
systems requirements and designate a Treasury official who shall be
responsible for bringing its systems into substantial compliance by
that date.
[End of section]
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