Financial Audit
IRS's Fiscal Years 2001 and 2000 Financial Statements Gao ID: GAO-02-414 February 27, 2002This report presents the results of GAO's audits of the financial statements of the Internal Revenue Service (IRS) for fiscal years 2001 and 2000. GAO was able to provide unqualified opinions on IRS's fiscal years 2001 and 2000 financial statements because IRS senior management and staff made extraordinary efforts to compensate for serious internal control and systems deficiencies. Despite these efforts, IRS found it extremely difficult to meet the February 27 reporting deadline set by the Office of Management and Budget (OMB). OMB intends to significantly accelerate this deadline in the future. Beginning with fiscal year 2004, IRS will be required to issue its financial statements by November 15--only 6 weeks after the end of the fiscal year. Moreover, the Department of Treasury has established a goal of completing its fiscal year 2002 audit, including those of its component entities, and issuing its department wide accountability report by November 15, 2002. To meet this goal and sustain an unqualified opinion on its financial statements, IRS will need to make systemic changes in how it processes transactions, maintains its financial records, and reports its financial results. At present, IRS lacks timely, accurate, and useful financial information and sound controls with which to make fully informed decisions and ensure ongoing accountability.
GAO-02-414, Financial Audit: IRS's Fiscal Years 2001 and 2000 Financial Statements
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United States General Accounting Office: GAO:
Report to the Secretary of the Treasury:
February 2002:
Financial Audit:
IRS's Fiscal Years 2001 and 2000 Financial Statements:
GAO-02-414:
Contents:
Letter:
Auditor's Report:
Management Discussion and Analysis:
Financial Statements:
Balance Sheets:
Statement of Net Cost:
Statements of Changes in Net Position: Statements of Budgetary
Resources: Statements of Financing:
Statements of Custodial Activity: Notes to the Financial Statements:
Supplemental and Other Accompanying Information:
Appendixes:
Appendix I: Material Weaknesses, Reportable Conditions, and Compliance
Issues:
Appendix II: Details on Audit Methodology:
Appendix III: Comments from the Internal Revenue Service:
Abbreviations:
EITC: earned income tax credit:
FFMIA: Federal Financial Management Improvement Act of 1996:
FFMSR: Federal Financial Management Systems Requirements:
FIA: Federal Managers' Financial Integrity Act of 1982:
IRS: Internal Revenue Service:
JFMIP: Joint Financial Management Improvement Program:
OMB: Office of Management and Budget:
P&E: property and equipment:
SGL: U.S. Government Standard General Ledger:
TIGTA: Treasury Inspector General for Tax Administration:
[End of section]
Comptroller General of the United States: United States General
Accounting Office: Washington, D.C. 20548:
February 27, 2002:
The Honorable Paul H. O'Neill:
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, 2001, and 2000. Our audits
were required by the Chief Financial Officers Act of 1990, as expanded
by the Government Management Reform Act of 1994. This report contains
our (1) unqualified opinions on IRS's financial statements, (2)
opinion that IRS's internal controls were not effective as of
September 30, 2001, and (3) report on IRS's noncompliance with one
provision of laws and regulations that we tested and IRS's financial
management systems' lack of substantial compliance with the
requirements of the Federal Financial Management Improvement Act of
1996.
Our unqualified opinions on IRS's fiscal years 2001 and 2000 financial
statements were made possible by the extraordinary efforts of IRS
senior management and staff to compensate for serious internal control
and systems deficiencies. However, even with these efforts, IRS found
it extremely difficult to meet the February 27 reporting timeline
required by the Office of Management and Budget (OMB) for fiscal year
2001, which is 5 months after the fiscal year end. OMB has announced
the executive branch's intention to significantly accelerate this
timeline in future years. Beginning with fiscal year 2004, IRS will be
required to issue its financial statements by November 15, or 6 weeks
after the fiscal year end. Also, the Department of the Treasury has
established a goal of completing its fiscal year 2002 audit, including
those of its component entities, and issuing its department wide
accountability report by November 15, 2002. If IRS is to meet this
deadline and sustain an unqualified opinion on its financial
statements, the tremendous amount of hard work and commitment IRS has
demonstrated in recent years will no longer be sufficient to achieve
this goal unless accompanied by systemic changes in how IRS processes
transactions, maintains its financial records, and reports its
financial results. At present, IRS continues to lack timely, accurate,
and useful financial information and sound controls with which to make
fully informed decisions and to ensure ongoing accountability. IRS is
continuing to work to address its serious control and systems
deficiencies.
The accompanying report also discusses other significant issues that
we considered in performing our audit and in forming our conclusions
that we believe should be brought to the attention of IRS management
and users of IRS's financial statements.
We are sending copies of this report to the chairmen and ranking
minority members of the Senate Committee on Appropriations; Senate
Committee on Finance; Senate Committee on Governmental Affairs; Senate
Committee on the Budget; Subcommittee on Treasury, General Government,
and Civil Service, Senate Committee on Appropriations; Subcommittee on
Taxation and IRS Oversight, Senate Committee on Finance; Subcommittee
on Oversight of Government Management, Restructuring, and the District
of Columbia, Senate Committee on Governmental Affairs; House Committee
on Appropriations; House Committee on Ways and Means; House Committee
on Government Reform; House Committee on the Budget; Subcommittee on
Government Efficiency, Financial Management, and Intergovernmental
Relations, House Committee on Government Reform; and Subcommittee on
Oversight, House Committee on Ways and Means. In addition, we are
sending copies of this report to the chairman and vice-chairman of the
Joint Committee on Taxation, the commissioner of internal revenue, the
director of the Office of Management and Budget, the chairman of the
IRS Oversight Board, and other interested parties. Copies will be made
available to others upon request.
This report was prepared under the direction of Steven J. Sebastian,
Acting Director, Financial Management and Assurance, who can be
reached at (202) 512-3406. If I can be of further assistance, please
call me at (202) 5125500.
Sincerely yours,
Signed by:
David M. Walker:
Comptroller General of the United States:
[End of letter]
Comptroller General of the United States: United States General
Accounting Office: Washington, D.C. 20548:
To the Commissioner of Internal Revenue:
In accordance with the Chief Financial Officers (CFO) Act of 1990, as
expanded by the Government Management Reform Act of 1994, this report
presents the results of our audits of the financial statements of the
Internal Revenue Service (IRS) for fiscal years 2001 and
2000.[Footnote 1] The financial statements report the assets,
liabilities, net position, net costs, changes in net position,
budgetary resources, reconciliation of net costs to budgetary
obligations, 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
owed the federal government but which have not been identified by IRS,
often referred to as the "tax gap."
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. The size and complexity of IRS's
operations present additional challenges to management. IRS is a
large, complex, organization with about 100,000 people in 10 service
center campuses, 3 computing centers, and numerous other field offices
throughout the United States. Historically, other than headquarters,
most IRS offices have had responsibilities tied to their geographical
locations. However, in response to congressional concerns about IRS's
operations embodied in the Internal Revenue Service Restructuring and
Reform Act of 1998, IRS underwent a reorganization that significantly
affected the previous roles and responsibilities of these offices. In
fiscal years 2001 and 2000, IRS collected over $2 trillion in tax
payments, processed over 210 million tax returns, and paid about $251
billion and $194 billion, respectively, in refunds to taxpayers.
Refunds paid during fiscal year 2001 included about $36 billion in
advance payments (i.e., tax rebates) of tax year 2001 tax credits
disbursed in accordance with the Economic Growth and Tax Relief
Reconciliation Act of 2001 (26 U.S.C. §6428).
One of the largest obstacles facing IRS management today is that the
agency still does not have a financial management system capable of
producing reliable and timely information its managers need to make
day-to-day decisions. Because of this systems issue and other factors,
it continues to face many of the pervasive internal control weaknesses
that we have reported each year since we began auditing IRS's
financial statements in fiscal year 1992.[Footnote 2] Nevertheless, in
fiscal year 2001, for the second consecutive year, IRS was able to
produce financial statements covering its tax custodial and
administrative activities that are fairly stated in all material
respects. However, because of its serious systems and control
weaknesses, IRS was again compelled to rely extensively on costly,
time-consuming processes; statistical projections; external
contractors; substantial adjustments; and monumental human efforts
that extended nearly four months after the September 30, 2001, fiscal
year-end to derive reliable year-end balances for its financial
statements. These costly efforts would not have been necessary if
IRS's systems and controls operated effectively. It is also important
to note that this approach cannot produce the reliable, useful, and
timely financial and performance information IRS needs for decision-
making on an ongoing basis, which is a goal of the CFO Act, nor can it
fully address the underlying financial management and operational
issues that adversely affect IRS's ability to effectively fulfill its
responsibilities as the nation's tax collector. We reported on these
continuing significant challenges for IRS in our high-risk and
performance and accountability series[Footnote 3] and other reports.
Strong commitment and hard work by both IRS senior leadership and
staff continues to be the key to IRS's ability to overcome its
fundamental systems and internal control deficiencies and achieve its
goal of receiving unqualified audit opinions on its financial
statements for fiscal years 2001 and 2000. However, IRS found it
extremely difficult to prepare its financial records for audit
examination and issue its financial statements within the reporting
timeline required by the Office of Management and Budget (OMB) for
fiscal year 2001. OMB has announced the executive branch's intention
to significantly accelerate this timeline for future years and by
fiscal year 2004, IRS will be required to issue its financial
statements by November 15, or 6 weeks after fiscal year end. Also, the
Department of the Treasury has established a goal of completing its
fiscal year 2002 audit, including those of its component entities, and
issuing its department wide accountability report by November 15,
2002. If IRS is to meet this deadline while sustaining an unqualified
opinion on its financial statements, the tremendous amount of hard
work and commitment IRS has demonstrated in recent years will no
longer be sufficient unless it is accompanied by significant and
systemic changes in how IRS processes transactions, maintains its
records, and reports its financial results. This year, IRS made
notable progress in a number of areas and has laid the groundwork for
sustainable improvements in several others. For example, IRS has made
important progress in addressing deficiencies in its controls over
budgetary activity, accountability over property and equipment, and
computer security. At the same time, further actions are needed and we
continue to consider these issues to be material weaknesses.[Footnote
4]
The challenge for IRS will be to continue the improvements made in
recent years. This not only means continuing to improve its
compensating processes but, more importantly, to develop and implement
the fundamental long-term solutions that are needed to address the
internal control weaknesses we have identified. Some of these
solutions can be addressed in the near term through the continued
efforts and commitment of IRS senior management and staff. Others,
which involve modernizing IRS's financial and operational systems,
will take years to fully achieve.
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, net
position, changes in net position, budgetary resources, reconciliation
of net costs to budgetary obligations, and custodial activity, as of
and for the fiscal years ended September 30, 2001, and September 30,
2000, and IRS's net costs for the fiscal year ended September 30, 2001.
However, misstatements may nevertheless occur in other financial
information reported by IRS as a result of the internal control
weaknesses described in this report.
IRS's financial statements report tax revenues collected during the
fiscal year and the cumulative amounts of unpaid taxes where there is
agreement with IRS, either by the taxpayer or court, as to the amounts
owed. Cumulative unpaid tax assessments for which there is no future
collection potential or where there is no agreement as to the amounts
owed are not reported in the financial statements, but are reported as
write-offs and compliance assessments, respectively, in supplemental
information to IRS's financial statements. However, 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, in accordance with U.S. generally accepted accounting
principles, they are not reported in the financial statements nor in
supplemental information to the financial statements. As IRS discusses
in the other accompanying information to the financial statements, IRS
does not have current information upon which to base a reasonable
estimate of the magnitude of these unidentified and unpaid taxes”
referred to as the "tax gap". We have discussed this issue in our high-
risk series.[Footnote 5]
Opinion on Internal Controls:
Because of the material weaknesses in internal controls discussed
below, IRS did not maintain effective internal controls over financial
reporting (including safeguarding of assets) or compliance with laws
and regulations, and thus did not provide reasonable assurance that
losses, misstatements, and noncompliance with laws material in
relation to the financial statements would be prevented or detected on
a timely basis. Our opinion is based on criteria established under 31
U.S.C. 3512 (c), (d), the Federal Managers' Financial Integrity Act of
1982 (FIA), and OMB's Circular A-123, Management Accountability and
Control.
Despite its material weaknesses in internal controls and its system
deficiencies, IRS was able to prepare, through compensating processes
and approaches, financial statements that were fairly stated in all
material respects for fiscal years 2001 and 2000. Nonetheless, IRS
continues to face the following key issues that represent material
weaknesses in internal controls:
* an inadequate financial reporting process, resulting in IRS not (1)
being able to prepare reliable financial statements without extensive
compensating procedures or (2) having current and reliable ongoing
information to support management decision-making and to prepare cost-
based performance measures;
* weaknesses in controls over unpaid tax assessments, resulting in
IRS's inability to properly manage unpaid assessments and leading to
increased taxpayer burden;
* weaknesses in controls over the identification and collection of tax
revenues due the federal government and the issuance of tax refunds,
resulting in potentially billions of dollars in improper payments and
lost revenue to the federal government;
* inadequate controls over property and equipment, resulting in IRS's
inability to reliably and timely report its property and equipment
balances and reasonably ensure that its property and equipment is
safeguarded and used only in accordance with management policy;
* weaknesses in controls over budgetary activity, resulting in IRS's
inability to routinely ensure that its budgetary resources are being
properly accounted for, reported, and controlled; and;
* weaknesses in computer security controls, potentially resulting in
unauthorized individuals being allowed to access, alter, or abuse
proprietary IRS programs and electronic data and taxpayer information.
The material weaknesses in internal controls noted above 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 weaknesses.
In addition, unaudited financial information reported by IRS,
including budget and performance information, may also contain
misstatements resulting from these weaknesses.
In addition to the material weaknesses discussed above, we identified
one reportable condition which, although not a material weakness,
represents a significant deficiency in the design or operation of
internal controls that could adversely affect IRS's ability to meet
the internal control objectives described in this report. This
condition concerns deficiencies in controls over hard-copy tax
receipts and taxpayer data that increase the government's and
taxpayers' risk of loss or inappropriate disclosure of taxpayer data.
In previous audits, we also reported that IRS was unable to determine
the specific amount of revenue it actually collected for three of the
federal government's four largest trust funds.[Footnote 6] During
fiscal year 2001, this condition continued to exist, but we have
included it as part of the material weakness in financial reporting.
We have reported on these material weaknesses and reportable
conditions in prior audits and have provided IRS numerous
recommendations to address these issues, of which over 70 were still
open as of the date of this report. We will follow up in future audits
to monitor IRS's progress in implementing these recommendations. For
more details on these issues, see appendix I.
Compliance with Laws and Regulations and FFMIA Requirements:
Our tests of compliance with selected provisions of laws and
regulations disclosed one instance of noncompliance with laws and
regulations that is reportable under U.S. generally accepted
government auditing standards. This relates to IRS's timing of the
release of tax liens on taxpayers' property. Also, IRS's financial
management systems did not substantially comply with the following
requirements of the Federal Financial Management Improvement Act of
1996 (FFMIA): (1) Federal Financial Management Systems Requirements,
(2) applicable federal accounting standards (U.S. generally accepted
accounting principles), and (3) the U.S. Government Standard General
Ledger (SGL) at the transaction level. IRS has readily acknowledged
its financial management systems do not comply with FFMIA and the need
to overhaul these systems as part of its broader systems modernization
efforts.
In prior years,[Footnote 7] we reported that IRS was not in compliance
with Section 6159 of the Internal Revenue Code, which authorizes IRS
to enter into installment agreements with taxpayers to fully satisfy
the taxpayer's liability. We did not identify any instances of
material noncompliance with this statute during fiscal year 2001.
[Footnote 8]
For more details on these issues, see appendix 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 or OMB audit guidance. 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.
Consistency of Other Information:
IRS's Management Discussion and Analysis, required supplemental
information, and other accompanying information contain a wide range
of data, some of which are 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. Based on this limited work, we
found no material inconsistencies with the financial statements or
nonconformance with OMB guidance. Under OMB guidance for the financial
statements of federal agencies, agencies are asked to strive to
develop and report objective measures that, to the extent possible,
provide information about the cost-effectiveness of their programs.
However, we found that IRS cannot report reliable cost-based
performance measures relating to its various programs in accordance
with the Government Performance and Results Act of 1993.
Objectives, Scope, and Methodology:
Management is responsible for (1) preparing the annual financial
statements in conformity with U.S. generally accepted accounting
principles, (2) establishing, maintaining, and assessing internal
control to provide reasonable assurance that the broad control
objectives of 31 U.S.C. 3512, (c), (d), FIA are met, (3) ensuring that
IRS's financial management systems substantially comply with the
requirements of FFMIA, and (4) complying with applicable laws and
regulations.
We are responsible for obtaining reasonable assurance about whether
(1) the financial statements are presented fairly, in all material
respects, in conformity with U.S. generally accepted accounting
principles and (2) management maintained effective internal controls,
the objectives of which are the following:
* Financial reporting”transactions are properly recorded, processed,
and summarized to permit the preparation of financial statements in
conformity with U.S. generally accepted accounting principles and
assets are safeguarded against loss from unauthorized acquisition,
use, and disposition.
* Compliance with laws and regulations”transactions are executed in
accordance with laws governing the use of budget authority and with
other laws and regulations that could have a direct and material
effect on the financial statements and any other laws, regulations,
and government wide policies identified by OMB audit guidance.
We are also responsible for (1) testing whether IRS's financial
management systems substantially comply with the three FFMIA
requirements, (2) testing compliance with selected provisions of laws
and regulations that have a direct and material effect on the
financial statements and laws for which OMB audit guidance requires
testing, and (3) performing limited procedures with respect to certain
other information appearing in these annual financial statements. For
more details on our methodology, see appendix II.
We did not evaluate all internal controls relevant to operating
objectives as broadly defined by FIA, such as controls relevant to
preparing statistical reports and ensuring efficient operations. We
limited our internal control testing to testing controls over
financial reporting and compliance with laws and regulations.
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 had a direct and material effect on the financial statements or
that were required to be tested by OMB audit guidance that we deemed
applicable to the financial statements for the fiscal year ended
September 30, 2001. We caution that noncompliance may occur and not be
detected by these tests and that such testing may not be sufficient
for other purposes.
We performed our work in accordance with U.S. generally accepted
government auditing standards and OMB audit guidance.
Agency Comments and Our Evaluation:
In responding to this report, IRS noted that maintaining the
unqualified audit opinion for its annual financial statements for the
second year in a row is a significant accomplishment, and agreed with
the report that this was the result of a strong commitment and hard
work by its management and staff. IRS reiterated this commitment,
emphasizing its belief that it is essential for a tax agency
responsible for collecting over $2 trillion in tax revenue to be able
to properly reflect its financial condition. IRS noted that its
commitment is demonstrated not only by the unqualified audit opinion,
but also by many improvements and initiatives it has undertaken, which
are intended to address the issues we have reported and to improve the
timeliness and accuracy of its financial information. For example, IRS
cited improvements and planned initiatives to address problems such as
controls over P&E disposals, review and accounting for open
obligations, utilization of existing cost information, computer
security, fingerprinting of staff entering on duty, and recording and
reporting financial transactions. We will evaluate the effectiveness
of these efforts in future audits.
In its response, IRS noted that the vast majority of the report is on
the mark, but it was concerned that a few of the report's conclusions
overstate its shortcomings. In commenting on the report's discussion
of IRS's controls over budgetary activity, IRS agreed with the
report's findings. However, IRS disagreed with the report's statement
that IRS cannot ensure that its obligations do not exceed its budget
authority. IRS indicated that it clearly does have this capability, as
demonstrated by the fact that, according to IRS, its obligations have
never exceeded its budget authority. However, the weaknesses we
identified in IRS's controls over its budgetary activity, particularly
with respect to delays in recording obligations, increase the risk
that IRS could incur obligations in excess of its budget authority and
not timely detect this occurrence. Our intent is to point out a
potential impact of the internal control weakness we identified.
Regarding the timeliness of IRS's financial statement preparation, IRS
disagreed with the report's statement that its efforts to produce
financial statements extended nearly 4 months beyond the end of the
fiscal year. IRS stated that on December 14, 2001, it delivered
financial statements that contained reliable year-end balances.
However, these financial statements were materially incomplete and
thus did not conform to federal reporting standards. For example, (1)
the balance sheet did not include taxes receivable or the related
liability to Treasury, which constituted over 79 percent of IRS's
assets and 85 percent of its liabilities, respectively, (2) two of
IRS's footnotes excluded required material disclosures related to the
status of its fund balance and its capital lease assets, and (3)
material balances were missing from two other footnotes, as well as
from the other accompanying information to the financial statements.
The first materially complete draft financial statements were
delivered to us on February 8, 2002. Additionally, auditable evidence
supporting several material balances in the financial statements was
not provided to us until several weeks after the December 14 draft of
the financial statements was delivered. For example, support for IRS's
$36 billion in tax refund rebates was not provided to us until January
2002.
In responding to our discussion of IRS's lack of a cost accounting
system, IRS agreed that it needs an integrated cost accounting system,
but believed that we overstated the impact of not having such a system
on decision-making. IRS indicated that its current systems provide
adequate cost information for good decision-making and that this
information is being effectively used as part of IRS's strategic
planning and budgeting process. In our report, we acknowledge that IRS
has stated that its records contained the information it believes was
necessary to determine the cost of various activities. However, our
point is that the time and difficulty involved in obtaining this
information from a variety of information systems significantly
affects its timeliness and usefulness to managers as an ongoing
decision-making tool. In addition, the problems we discuss in our
report regarding the quality of IRS financial data at interim periods
also affect the reliability of cost data.
Regarding the report's discussion of tax revenue and refunds, IRS
noted that the report does not take into account the necessity of an
interview with the taxpayer in many cases to determine E1TC
eligibility. We recognized in the report that there are inherent
limitations to IRS's ability to identify and pursue the correct amount
of taxes owed and to ensure that only valid refunds are issued. While
not specifically cited in the report, we would agree that this is
another relevant limitation. Nonetheless, given the potential
magnitude of improper refund disbursements and underreported taxes as
discussed in this report, it continues to be our position that the
preventive and detective controls IRS does have could be strengthened.
With respect to the report's discussion of manual tax receipts and
taxpayer information, IRS disagreed with our statement that 128 of the
over 20,000 individuals hired in fiscal year 2001 began working at IRS
facilities before IRS received and evaluated the results of their
fingerprint checks. IRS stated that based on its analysis, 52 such
individuals began working without fingerprint checks. Subsequent to
providing IRS a draft of our report that cited the 128 exceptions, IRS
provided us with additional documentation. This documentation enabled
us to clear 24 of these cases, thus reducing the number of exceptions
to 104. We have changed our report accordingly. The difference between
our current 104 exceptions and IRS's 52 exceptions is caused by
several different categories of cases that IRS believes do not
constitute exceptions with which we disagree. For example, in 13
cases, IRS cited that the employees were hired under a waiver that
allowed them to enter on duty before their fingerprint check results
were received. The waiver cited management's expectation that all
fingerprint checks would be received for these employees by the end of
their 2-week training period. However, for these 13 employees, no
fingerprint checks had been initiated or received for at least 2
months after they entered on duty. In several of these cases,
fingerprint checks had not been initiated at all at the time of our
inquiry, even though some of these employees had already been on duty
for over 7 months. We do not dispute that management has the authority
to grant waivers in certain emergency situations; but as the waivers
themselves indicate, this does not absolve IRS of its responsibility
to perform due diligence to ensure that fingerprint checks are
performed for such employees as soon as possible. As noted in the
report, IRS has shown significant improvement in meeting its policy of
ensuring that no individual enters on duty at any IRS location until
the fingerprint results and case disposition information is received
and reviewed.
The complete text of IRS's response is included in appendix III.
Signed by:
David M. Walker:
Comptroller General of the United States:
February 8, 2002:
[End of section]
Management Discussion and Analysis:
Department of the Treasury:
Internal Revenue Service:
Management Discussion And Analysis: Fiscal Year 2001:
Mission Statement:
Provide America's taxpayers top quality service by helping them
understand and meet their tax responsibilities and by applying the tax
law with integrity and fairness to all.
1. Modernizing The IRS - Goals, Principles, and Change:
Serving taxpayers better is the key concept behind everything the IRS
is doing to modernize. The importance of service is reflected in three
goals:
* Service to each taxpayer;
* Service to all taxpayers;
* Productivity through a quality work environment.
Five guiding principles lead us to modernization. These guiding
principles allow the IRS to manage both the organizational change and
the operations and maintenance that must continue during the
rebuilding process. The guiding principles are:
* Understand and solve problems from taxpayer's point of view;
* Expect managers to be accountable”knowledge, responsibility,
authority, action;
* Align measures of performance to all organizational levels;
* Foster open, honest communication;
* Insist on total integrity.
Finally, there are five equally important, critical areas of change
needed for our modernization to be successful.
* Revamped business practices;
* Customer focused operating divisions;
* Management roles with clear responsibility;
* Balanced measurement of performance;
* New technology.
2. Organization and Management:
Our organization, as depicted below, is focused on taxpayers aligned
to one of four operating divisions ” Wage and Investment, Small
Business and Self-Employed, Large and Mid-Size Business, and Tax
Exempt and Government Entities.
Top level:
* Commissioner; Deputy Commissioner;
* Chief Counsel;
* National Headquarters.
Second level, reporting to Commissioner; Deputy Commissioner:
* Shared Services:
- Area-Wide Shared Services;
- Area-Wide Information Technology Services;
- Appeals;
* Functional Units:
- Taxpayer Advocate Service;
- Criminal Investigation Division; Communications and Liaison.
Third level, reporting to Commissioner; Deputy Commissioner:
* Wage and Investment Division;
* Small Business and Self-Employed Division;
* Large and Mid-Size Business Division;
* Tax Exempt and Government Entities Division.
The Wage and Investment Division is structured to serve taxpayers with
less complex issues through a field organization that provides the
information, support, and assistance that they need to understand and
fulfill their tax obligations. Processing, account management, and
compliance services are provided through eight Service Centers.
The Small Business and Self-Employed Division, has a compliance field
organization that includes both examination and collection groups and
reports to a multi-functional manager.
The Large and Mid-Size Business Division is predominantly a field
organization that is structured into five industry groups which are;
Communications, Technology & Media, Financial Services, Heavy
Manufacturing & Transportation, Natural Resources & Construction, and
Retailers, Food, Pharmaceuticals & Healthcare.
The Tax Exempt and Government Entities Division has a support
structure for each type of taxpayer it will serve ” exempt
organization, pension plans, and governmental entities.
The Appeals organization remains an independent channel for taxpayers
who have a dispute over a recommended enforcement action.
The Chief Counsel has established a senior legal executive as the
Division Counsel for each operating division to participate fully in
the plans and activities of the operating division management and to
provide high-quality legal advice and representation.
Communications and Liaison manages relationships with the media,
Congress, state and local governments, and other external stakeholders.
The Criminal Investigation unit has sole responsibility for
investigating criminal violations of tax law and will, for the first
time, operate as a line unit within the IRS.
The centralization of Information Technology Services under the Chief
Information Officer and of other common services under an Area-Wide
Shared Services organization provides for efficient and standardized
common services.
The National Headquarters focuses on strategic direction, capital
allocations, and building partnerships with key stakeholders (e.g.,
Congress, Office of Management and Budget).
The Taxpayer Advocate Service is geographically distributed to provide
local contact with taxpayers. Operating Division Taxpayer Advocates
work directly with operating divisions to identify and recommend
solutions to systemic problems.
The reduction in layers of management and the number of separate major
units frees up personnel resources to increase support for customer
education and assistance programs. Similarly, the reduction of
separate operational units and the centralization of management of key
functions such as processing, customer assistance, and collection
within each division eases standardization of business practices and
introduction of new technology.
3. FY 2001 Accomplishments:
Background:
The IRS Restructuring and Reform Act of 1998 (RRA 98) gave IRS a clear
mandate ” do a better job meeting the needs of taxpayers as well as
collecting the money. We expressed this direction in a new IRS mission
statement: "Provide America's taxpayers top quality service by helping
them understand and meet their tax responsibilities and by applying
the tax law with integrity and fairness to all."
It is equally important that we define the specific goals and
objectives needed to achieve our mission. They are top-quality service
to each taxpayer in every interaction; top-quality service to all
taxpayers through fair and uniform application of the law; and
productivity through a quality work environment. If progress is made
on all three of these goals, we can be confident that we are moving
toward achieving our mission and meeting the public's expectations.
Commencing in FY 2001, the IRS Commissioner determined that a set of
critical measures comprised of taxpayer facing activities would
represent the IRS strategically, until the planned strategic measures
were implemented. These measures, totaling 65 were carefully selected
and adopted by the senior management team and are used for all
external and internal reporting. The 15 key performance indicators
outlined in the original FY 2001 budget were replaced with the
critical measures and published in the FY 2002 Congressional
Justification issued in April 2001.
In development of both the IRS budget and the strategy and program
plans, each division commissioner also identified a set of measures
along with targets that represent their strategies and program areas
funded. At the operational level, each Commissioner is responsible for
reporting on delivery of performance and budget through the Business
Performance Review System. This system of reporting provides for
scheduled meetings of the IRS Senior Management team led by a division
commissioner to discuss accomplishments, performance against plan, and
budget impacts.
To provide continuity across the Service that allows the Commissioner
to manage the IRS at the strategic level, organizational units are
required to articulate their strategy and program plans in terms of
customer service and the functional activities that deliver customer
service and compliance. Those services and the critical measures fall
into three distinct categories:
Pre-Filing Services ” services that are provided to a taxpayer before
the return is filed to assist in filing a correct return.
Filing Services ” services that are provided to a taxpayer in the
process of filing a return and paying taxes.
Post-Filing Compliance Services ” services that are provided to a
taxpayer after a return is filed to identify and correct a possible
erroneous underpayment.
Activities associated with Administration of Earned Income Tax Credit
(EITC) are threaded throughout the three categories listed above and
also discussed in greater detail in the Management Challenges section
of this document.
Performance measures also address Customer Satisfaction in all of the
operating divisions and the service-wide level of Employee
Satisfaction.
By organizing the strategy and program plans, the budget, financial
plans and reports, and accounting systems around the three service
categories and supporting activities the IRS ensures a consistent and
holistic approach to planning for and delivering on our strategic
goals and objectives.
Pre-Filing Services:
Better pre-filing services can reduce the need to fix a problem after
it has occurred, or to take enforcement actions. Both are more time
consuming and costly for the taxpayer and the IRS. This approach
promises to be particularly helpful for America's small businesses,
especially start-up businesses, which are confronted with a large
array of new tax and filing requirements. If we can eliminate
confusion, errors and mistakes before a return or form is ever filed,
America's taxpayers will be spared countless numbers of notices and
communications with the IRS. By helping taxpayers better understand
their tax filing, payment and reporting requirements, and by giving
them the information and tools they need, we believe voluntary
compliance should increase markedly.
The Stakeholder Partnership, Education and Communications (SPEC)
branch of our Wage and Investment Operating Division worked in FY 2001
to energize the VITA (Volunteer Income Tax Assistance) return
preparation program. Working with more than 18,000 volunteer sites
across the country W&I assisted an estimated 4.7 million taxpayers
wanting this service.
Working hand-in-hand with SPEC to help taxpayers understand their
obligations, is the Taxpayer Education and Communications (TEC)
function of the Small Business/Self Employed Operating Division. Once
fully realized, both their education and pre-filling services will
benefit both taxpayers and our tax administration system in many ways.
For example, in FY 2001, 1,181 small business taxpayers benefited from
IRS workshops while 3,104 taxpaying entities were provided with
assistance via issuance of voluntary agreements and industry guides.
In FY 2001 IRS continued to provide electronic communication tools for
taxpayers, answering more than 264,000 questions submitted by
taxpayers in all tax related filing categories.
Filing Services:
A primary indicator of success can be measured by the filing season.
IRS delivered a successful filing season in 2001. Total revenue
collected was $2.1 trillion. We processed over 130 million individual
returns, and issued over 92 million refunds. IRS representatives also
met with 9.4 million taxpayers and we answered 108 million telephone
calls and responded to 19.2 million letters. The sheer size of the
numbers is just one indicator of the complexity and magnitude of our
task.
Since 1998, we provided extended hours of telephone service during the
filing season. We also put on more assistors at peak hours, rather
than just during normal business hours. Almost 108 million taxpayers
called on one of our toll-free lines during FY 2001. We answered 76
million automated and Teletex calls, and our live assistors answered
32 million taxpayer calls. Additionally, our San Patrick), Puerto Rico
call site became fully operational in 2001 and we believe that it will
greatly assist us in providing better access and service to Spanish-
speaking taxpayers.
In 2001, more than 40 million taxpayers filed electronically ” a 13
percent rise from last year. Since 1997, e-filing increased by 110
percent, and on-line filing grew by a staggering 1,700 percent.
Achieving the congressionally mandated goal for electronic filing (80
percent of returns filed by 2007) will be very difficult, but by
working with taxpayers and practitioners, we will continue to remove
the barriers to e-filing.
For the 2001 filing season, we added 23 additional forms to the 1040-e-
file program. And we will achieve a major milestone in 2002 ”
virtually all 1040 forms and schedules can be filed electronically and
no paper signature document is required. We also introduced Electronic
Federal Tax Payment System (EFTPS) OnLine, which allows businesses to
enroll in the system, make secure federal tax payments and check their
electronic payment history over the Internet.
Taxpayer use of the IRS web site in FY 2001 smashed all records ” 2.6
billion hits with more than 103 million forms and publications
downloaded. In 2001, we also launched the Small Business and Self-
Employed Community web page. And in 2002, we will unveil a revamped
IRS web site designed to be a world-class transaction based gateway.
Many taxpayers prefer telephoning the IRS. Today, nearly all callers
have almost immediate access to automated services. However, in the
2001 filing season, taxpayers that wanted to reach an assistor were
successful only 64 percent of the time. Although this was an
improvement, these times are still unacceptable to both taxpayers and
the IRS. Our real goal is to improve the quality of the service we
provide taxpayers both on the telephone and at our taxpayer assistance
centers.
Once connected, taxpayers must get prompt, accurate and courteous
answers to their account and tax questions. Here too, we have made
substantial progress towards providing better service to taxpayers.
The telephone quality rates for tax law and tax account questions
showed a marked improvement in FY 2001. They were up to 75 percent and
69 percent respectively as compared to 73 percent and 60 percent over
the same period last year. Although we would agree with the GAO's
assessment that we have not yet attained a world class customer
service level, we believe that we are on the right track to achieving
that goal.
Throughout the year, and at a variety of locations, we also schedule
the highly acclaimed Problem Solving Days to resolve long-standing
taxpayer issues for those who cannot take advantage of weekday problem
solving services. Problem Solving Days have an excellent track record
and we are moving toward incorporating the concept into daily
operations. That means using a cross-functional approach to resolve
most tax account issues with a single visit or phone call at any time
throughout the year. To help us meet this need; we created a new job
at the IRS, "Tax Resolution Representative." These IRS employees
received training and authority to provide "one-stop-service" for a
broad range of issues ranging from answering tax questions to
resolving payment problems.
In 2001, we provided even more tax burden relief to small businesses,
raising the deposit threshold yet again from $1,000 to less than
$2,499 in quarterly employment taxes. This affected about one million
small businesses. Through our continued efforts, we estimate that
between 70-80 percent of them can be relieved of the burden of making
as many as 12 deposits annually, the most frequent transaction of
small businesses with the IRS.
Post-Filing Compliance Services:
Our goal in 2001 was to stop the long-term decline in our compliance
activities while beginning to focus it effectively and efficiently on
key areas of non-compliance. Our tax system depends on each person who
is voluntarily meeting their tax obligation having confidence that
their neighbor or competitor is also complying. Service to all
taxpayers means applying the tax law fairly and uniformly. Therefore,
when taxpayers do not voluntarily meet their tax obligations, the IRS
must use its enforcement powers to collect the taxes that are due.
However, we simply do not have the resources to attack every case of
non-compliance. We must apply our resources to where non-compliance is
greatest while still maintaining adequate coverage of all other areas.
Our near term goal in 2001 was to stabilize the level of our key
compliance activities while beginning to focus on the areas of
greatest risk to our nation's tax system.
After careful study we identified and are addressing four important
areas of systematic noncompliance. These areas are: misuse of devices
such as trusts and pass-throughs to hide income, use of complex and
abusive corporate tax shelters to reduce taxes improperly, failure to
file and pay large accumulations of employment taxes, and erroneous
refund claims.
One of the most powerful tools that we use to ensure compliance is
matching information received from employers, financial institutions
and other businesses with information reported by taxpayers. In fact,
third parties report approximately 80 percent of the personal income
received by taxpayers. An important compliance strategy is to use this
data as effectively as possible.
For example, in FY 2001 IRS began capturing data from 16.8 million K-1
forms which are used to report income, credits and deductions of
partners, shareholders or beneficiaries. In 2002, the IRS will change
its processing procedures and begin processing and matching K-1s
reporting almost $700 million of income and also, importantly,
reported losses on trusts and pass-throughs. This will help us to find
potential problem cases and to follow up, when necessary, with audits.
However, no matter how effectively we use our resources and new
techniques to identify and prevent problems, some cases require
intervention by IRS compliance personnel. For example, although 80
percent of the individual income is reported by third parties, the
remaining 20 percent, mainly business income, are not reported and
often require in-person auditing to verify. Also, business income,
including that by pass-through corporations, partnerships and trusts
can only be verified through auditing.
In FY 2001, we implemented the first phase of a multi-year Collection
Re-engineering Program. It modifies our Inventory Delivery System to
ensure that we promptly assign business tax cases to Revenue Officers.
The Electronic Fraud Detection System is also being enhanced to
include selected Business Master File data that will permit research,
analysis, and evaluation of fraud detection scenarios for business
returns. Traditional Collection activities, while not meeting the
goals, have begun to stabilize and the number of liens filed and
levies issued increased by 49 percent and 103 percent respectively
over the previous year. We also made ten percent more determinations
for innocent spouse cases and processed 40 percent more offers in
compromise.
In-person examinations of individuals and corporations are the area
that takes the longest to turn around because of the length of time it
takes to train people and to complete cases even after they are
initiated. We have started to see some progress with an increase of 27
percent in examination of large corporations. We still have far to go
in our in-person examination rate, which declined about 20 percent. In
FY 2002, new revenue agent hires, increased efficiencies gained from
handling taxpayer cases and more direct case time will increase the
number of field examination and correspondence cases closed. If we
stay this course, we believe that compliance activity levels will
increase over the next three years.
In FY 2001, the IRS conducted an assessment of their external and
internal environments to identify trends, issues, and problems
affecting business operations and service delivery. Using that as a
basis, the IRS developed major strategies to provide guidance to
management in achievement of strategic goals over the next two to
three years. Within each strategy are more specific operational
priorities and improvement projects. Major parts of many IRS
strategies are accomplished through partnerships with state
governments, practitioners, and other industry and local groups who
are regularly in contact with taxpayers.
Two of the strategies developed, Address Areas of Non-Compliance and
Stabilizing Traditional Compliance Activities, address initiatives
focusing on collection of tax debt. These strategies identify more
specific operational priorities and improvement projects for key
compliance areas within the organization. The priorities and projects
provide practical guidance about how the limited IRS resources are
allocated and where management focus should be placed in order to
achieve the IRS goals.
* Address Areas of Non-Compliance:
Lack of reliable measures of compliance limit the IRS' ability to
assess progress on its goal of serving all taxpayers through effective
and fair application of the tax laws. However, research indicates that
there are major problem areas of substantial noncompliance. Research
studies have also provided vital information for guiding future pre-
filing efforts, identifying issues promptly, providing guidance to
field examination teams, and shaping communications and information
exchanges.
As mentioned previously, IRS began a matching program of information
returns to uncover the estimated 20% of pass-through income not
reported. This program will match 100% of Forms K1 income reported to
Forms 1120S, U.S. Small Business Corporation Income Tax Return; 1065,
U.S. Partnership Return of Income; and 1041, U.S. Fiduciary Income Tax
Return (for Estates and Trusts).
Through commitments from the Department of Justice (DOJ) Tax Division
and its own Criminal Investigation Division, the IRS established an
Abusive Trust Compliance Strategy to increase the examination time
applied to Partnership and Fiduciary return areas with abusive tax
shelters. Combined Examination and Collection specialty groups were
formed for this purpose and were further supported by specialists to
uncover areas of fraud.
In the area of Unpaid Trust Fund Taxes, the IRS, along with the DOJ,
established a Trust Fund Compliance Initiative to test new procedures
to reduce recurrence among in-business trust fund taxpayers. Re-
engineered procedures include pursuit of civil injunction rather than
criminal prosecution, and modifications to the Inventory Delivery
System, which the IRS uses to facilitate prompt assignment of current
trust fund accounts.
The IRS Criminal Investigation Division provided the Administration
and Congress with information regarding the scope of money-laundering
activities, both in the U.S. and worldwide. This information has been
an important factor in the promulgation of more effective money-
laundering legislation. More importantly, these efforts are expected
to have a profound effect on overall tax compliance because they have
laid the groundwork for making the transfer of money in or out of the
U.S. a money-laundering predicate (specified unlawful activities)
offense.
Fraud Detection Centers, located on service center campuses and
staffed by Criminal Investigation employees, implemented new processes
to enhance the detection of questionable refund returns. In addition,
a questionable Refund Scoring formula has been developed to improve
identification of false refund claims. Expansion of the program is
planned to include business refund fraud with initial focus on
employment tax return and trust fund fraud.
* Stabilize Traditional Compliance Activities:
Regardless of how successful the IRS is in preventing taxpayer errors,
it will always be necessary to intervene through examination and
collection actions, and investigations when non-compliance or non-
payment is found or suspected to be occurring.
Levels of traditional examination and collection activity have
continued to decline drastically over the past several years because
of reduced staffing, new requirements imposed by the IRS Restructuring
and Reform Act of 1998, the uncertainty over some provisions of the
act, and the need to divert considerable numbers of staff to assist
taxpayers during the filing season. Risk-based compliance intervention
techniques, coupled with more focused and rapid intervention, will
improve the quality and speed of casework.
In an effort to concentrate on getting back to core compliance
processes (examining tax returns and collecting taxes), the IRS
reduced filing-season support by compliance personnel by almost 50%
from past years' levels. New initiatives to re-engineer the collection
and examination functions were undertaken to change the way both
revenue agents and officers do their jobs.
Centralization of Innocent Spouse and Offer In Compromise cases also
occurred in FY 2001 to establish control of escalating inventories in
both areas and to reduce the burden on field employees.
In response to the dramatic change in workload, the Appeals Division
continued a comprehensive training program for its newly hired
settlement officers about collection issues, to equip personnel with
the knowledge and skills to handle the new Collection Due Process and
other collection type issues. To reduce the length of the appeals
process, improve service to all its customers while spending limited
compliance time most productively, Appeals implemented a major
strategy for issue management to identify issues that represent non-
compliance with the tax laws that are deemed important and widely
agreed upon. In addition, Appeals, in partnership with the operating
divisions, developed a common position about issues to assist
taxpayers in areas more prone to examination. Implementation of a fast-
track mediation/settlement program was completed to save time for
taxpayers in the large and mid-sized business areas, to resolve issues
quicker and to save time during the appeals process for both the IRS
and the taxpayer.
The IRS' strategies continuing into FY 2002 address the need to
stabilize the traditional compliance activities in the near term, and
design future strategies around new capabilities of business systems
modernization for more fundamental improvements.
To further improve productivity in FY 2002, the IRS plans to complete
hiring of traditional enforcement personnel for collection and
examination. In addition, continued improvements in areas such as
reducing taxpayer burden and broadening the use of electronic
interactions with taxpayers are expected to contribute to improvements
in many IRS performance areas.
Customer Satisfaction:
The IRS partners with Treasury by establishing strategies to maximize
voluntary tax law compliance by emphasizing customer satisfaction at
each phase of the filing process. While the effects of the IRS
reorganization on the taxpaying public will not be known for several
years, public perception of the IRS has been steadily rising over the
last three years. In FY 2001, the IRS received a 46% favorability
rating versus the extraordinary low level of confidence (32%)
expressed by the public during the 1997/1998 timeframe.
Coupled with improvements in customer satisfaction, scores in
transactional surveys at the operational levels gives an indication
that the improvements the IRS is making organizationally appear to
have had an impact on customer satisfaction. In FY 2001 improvements
were made in the following categories Automated Collection (increase
from 3.41 to 3.46 on a four-point scale); Collection Field (increase
from 4.45 to 5.01 on a seven-point scale); Correspondence Examination
(increase from 4.04 to 4.18 on a seven-point scale); and Field
Examination (increase from 4.41 to 4.65 on a seven-point scale).
Another indicator of improved customer satisfaction in the IRS can be
seen in rising quality scores since quality factors are often the same
factors addressed in the transactional surveys. Scores have shown
improvement in widely publicized taxpayer assistance areas such as Tax
Law (increase from 73 to 75 percent) and Account Inquiries (increase
from 60 to 69 percent), and the traditional compliance functions such
as Field Examination (increase from 58 to 70 percent), Correspondence
Examination (increase from 70 to 71 percent), and Automated
Underreporter (increase from 93 to 95 percent).
Some of the drivers that have led to improved customer satisfaction
and quality ratings for FY 2001 include:
* Continuous improvement in the way processes work and the way cases
are assigned;
* Updating tools and technology for employees that allow them to
better answer questions and address concerns of the taxpayer;
* Improving Earned Income Tax Credit outreach activities, including
increasing the toll-free assistance and extensive marketing and
taxpayer information campaigns;
* Conducting paid advertisement to promote electronic filing and
established partnerships with industry members by providing hyperlinks
to partner websites;
* Expanding the electronic filing options by adding an additional 23
forms and schedules taxpayers can file electronically; and;
* Offering expanded electronic payment options, including pay-by-phone
(toll-free) and pay-by-Internet applications.
In FY 2002, the IRS will begin to consider customer satisfaction in
the context of pre-filing, and filing activities. Previously, our
outlook largely considered results from transactional surveys that
viewed customer satisfaction from the post-filing side. While this
information is useful, it cannot help the agency identify improvement
opportunities until a problem occurs after a return is filed. By
widening our vision of customer satisfaction, the agency will be able
to identify customers concerns across the entire filing experience and
create solutions that prevent, rather than solve, problems. For
example, the Wage and Investment operating division will use market
segment surveys to better understand the pre-filing and filing
experience from their customers' perspective. This data will be
critical in identifying their customers' behavior patterns,
failpoints, needs, and preferences.
The IRS will also seek the opinions of its partners through the
Stakeholder Partnership Education and Communications (SPEC) survey in
FY 2002. Data from this survey will help refine our understanding of
the broad categories of experiences that exist with the IRS' partners.
Most importantly, the survey will clarify our partners' definition of
quality and their specific service expectations. This kind of data is
consistent with the agency's shift to customer-focus and an emphasis
on the entire spectrum of filing activities (pre-filing, filing, and
post-filing).
The Small Business and Self-Employed operating division will also use
customer satisfaction studies as one aspect in evaluating the
effectiveness of an innovative program aimed at newly created small
businesses --- the Mentor and Monitor Program. Focus group interviews
will assess the small business taxpayers' experiences with each aspect
of the pre-filing and filing activities of the new businesses. In this
case, a qualitative research study will reflect the customer's
expectations and point of view, a vital consideration for the
evaluation of this novel education and service delivery program.
The proactive approach to customer satisfaction measurement can also
be seen in the Large and Mid-Size Business (LMSB) surveys of the audit
process. These surveys will assess customer satisfaction at the audit
planning and audit completion processes. In addition, these surveys
will provide data that support improvement initiatives and track the
success of those improvement opportunities. As with the previously
mentioned studies, the agency anticipates that the creation of
improvement initiatives will be an important consequence of these LMSB
customer satisfaction surveys.
Last year, the concept of service to taxpayers went far beyond what is
normally expected of the IRS. Two events ” the issuance of millions of
advance refund checks and our response to the tragic events of
September 11 ” demonstrated how we could provide service to taxpayers
under extraordinary circumstances.
* Advanced Refund Initiative:
Just six weeks after President Bush signed into law the Economic
Growth and Tax Relief Reconciliation Act of 2001, we delivered for
taxpayers by getting their checks in the mail. To put in place the
approximately $36 billion advance payment provision, we began work
weeks earlier so that we would be prepared to handle the first rebate
in a quarter century.
The IRS coordinated an unprecedented outreach to America's taxpayers,
an intricate computer programming project, a flurry of news releases,
an updated irs.gov web site and additional assistors to handle record
call volumes.
Over Memorial Day weekend, Congress gave final approval to the 2001
tax bill, which included the advance payment. The provision set a
maximum amount of $300 for an individual, $500 for head of household
or $600 for married couples filing jointly.
The checks were an advance of a 2001 rate reduction credit and were
subject, as most tax provisions are, to various exceptions and
limitations. The five-percent credit was in lieu of a lower tax
bracket ” to 10 percent from 15 percent ” effective 2002.
The Department of Treasury estimated it would issue 90 million checks,
worth approximately $36 billion, over a 10-week period. The checks
began arriving in mailboxes on July 23 and no checks were issued after
December 31, 2001.
We decided to issue notices to all taxpayers, both those who qualified
and those who did not. We hoped the notices, issued prior to the
checks, would answer taxpayers' questions and reduce the number of
telephone calls. We contracted with a private vendor to print notices
for 130 million people ” nearly half the population of the United
States.
This is not to say the process was problem-free. In July, a computer
glitch caused almost a half-million taxpayers to receive notices with
inaccurate amounts of their checks. However, the error was identified
and those taxpayers were sent a second notice with the corrected
amount. In addition, our telephone systems were overwhelmed and many
taxpayers could not at first get through to us. Here too, the IRS
responded by retaining our seasonal workers and applying additional
resources to address the crunch. All told, we answered 23.5 million
taxpayer calls on the advanced refund both by our Customer Service
Representatives and through automated telephone applications.
* IRS Response to the September 11, 2001 Terrorist Activity:
Following the September 11 national tragedy, IRS and Treasury
Department employees did their best to minimize the distraction of tax
issues for the victims. By September 14, three days after the attack,
we provided administrative relief to the victims in the form of
extensions to file returns and pay taxes. We also suspended for six
months many enforcement actions for the affected taxpayers. In
addition, we established special toll-free numbers to answer any
questions, and we set up a special disaster relief page on our web
site.
To complement these efforts, we published a brochure; "Help from the
Internal Revenue Service for Those Affected by the Terrorist Attacks
on America" that explains the tax relief we are providing. To reach
the largest possible audience, we also placed public service
advertisements in USA Today, Sports Illustrated and Business Week.
However, our efforts do not end there.
Our Large and Mid-Size Business Division (LMSB) worked closely with
airline industries on the Air Transportation Safety and System
Stabilization Act legislation. It allowed for extension of due dates
for deposits and clarification that federal loans are included in the
airlines' income. LMSB also held an intensive, two-day technical
meeting to discuss issues with the principal industries located in the
World Trade Center.
On the law enforcement side, we are providing expertise on money
laundering. We are a key part of Operation Green Quest, the new multi-
agency initiative targeting funding sources for terrorist
organizations. Before and after the terrorist attacks, the IRS' Tax
Exempt/Government Entities (TE/GE) Operating Division also helped
educate the public on the legal requirements organizations must meet
to qualify for tax-exempt charitable status.
On September 18, we placed a new, easy-to-understand publication on
our web site that provided information to assist the public to make
use of charitable organizations. We also announced that we would speed
processing of requests for tax-exempt status from new charities formed
to assist the victims. Although we expedited the process, we did not
lower our standards for new organizations applying for the tax-exempt
status.
In addition, we worked with the September 11 charities to get
donations to the victims' families. On November 16, we issued interim
guidance that recognized the unique circumstances caused by the
tragedy. The notice stated that the charities will not put their
exemptions at risk by making payments to the victims and their
families without first proving they are in financial need. We wanted
to send a clear message that charitable groups that act in a
reasonable and good-faith manner to help the victims would not
endanger their tax-exempt status.
Employee Satisfaction:
In FY 2001, the IRS conducted two surveys of employees. SURVEY2001 was
a census survey of all employees, with the items focusing upon issues
that were deemed "actionable" at the workgroup level. Approximately
79,000, or 68%, of employees responded to the survey. It was
administered from April through May 2001 and approximately 10,000
Workgroup Reports were produced in July 2001. Workgroups used the
survey results to hold Employee Satisfaction meetings, identify
workplace issues, and take steps to resolve them.
To complement the census survey, a Climate Survey was administered in
August 2001 to a random sample of employees. About 14,700 surveys were
provided, and slightly more than 7,500 employees responded
(approximately 51%). The Climate Survey primarily focused upon items
deemed actionable at the Corporate-level.
Employee Satisfaction remains one of the key drivers in the Balanced
Measures Program that the IRS developed beginning in 1998. The ability
to retain and develop talented personnel is a determining factor in
how well we provide the quality of service taxpayers expect.
The overall level of employee satisfaction for FY 2001 was 51%, as
measured by SURVEY2001. The survey results fell below both the 60%
target and the FY 2000 level. The decline from 59% in FY 2000, to 51%
in FY 2001, can be attributed to the effects of the reorganization
(which is consistent with the Climate Survey). The IRS Commissioner
has made improving employee satisfaction the responsibility of each
individual manager (currently a commitment in each manager's
performance plan) and every Operating, Functional, and Support
Division (OD, FD, and SDs). The individual workgroup meetings are
taking place now, and the results will be seen when the FY 2002 survey
is administered, beginning in April 2002.
For FY 2001, the IRS included in its major strategies one that focused
on Recruitment, Development, and Retention of a Qualified Workforce.
To accomplish this strategy, in FY 2001, the IRS implemented the
following actions:
* Improved management training classes to enhance skills by re-
designing our management and leadership curriculum, and equipping
managers with more of the tools needed to do their jobs, such as
workload and strategic management;
* Improved employee training by providing Customer Service
Representatives with specialized training to help them better serve
the taxpayers;
* Developed and delivered a state-of-the-art classroom and on-the-job
training for compliance positions;
* Implemented the state-of-the-art Employee Resource Center to provide
employees access to workplace information and services by Intranet, e-
mail, telephone, and fax;
* Incorporated leadership competencies into performance evaluations
for executives and managers to facilitate alignment of the evaluation
system to the IRS' strategic goals;
* Simplified employee research tools by realigning the Internal
Revenue Manual (IRM) by business processes, and merging procedural
memoranda and desk/user guides into existing IRMs;
* Established a Service-wide Internal Communication Planning Group to
ensure that critical employee messages are communicated in the same
manner throughout the organization; and;
* Developed a "New for You in 2002" information campaign to target IRS
employees and communicate changes for the upcoming filing season.
In FY 2001, the Employee Satisfaction Survey was reduced in content
and layout based on the advice of the new survey vendor. Many items
were deleted or changed to minimize the burden on employees. For FY
2002, with our contract renewed with the survey vendor we plan to
continue to improve the readability of the survey while increasing
electronic (telephone and web-based) survey participation.
4. Management Challenges and High-Risk Areas:
Over the last several years the General Accounting Office (GAO) and
the Treasury Inspector General for Tax Administration (TIGTA) have
identified several Management Challenges and High-Risk Areas facing
the IRS. While specific steps and actions to address these issues have
been identified, progress toward addressing these issues is addressed
through IRS' existing program activities. Measures of IRS program
activities serve to show progress in addressing the management
challenges and high-risk areas. The following chart is a crosswalk
showing the relationship between the management challenge and the
program activities.
Table: Management Challenge Cross-walk to Program Activity:
Management Challenge or High Risk Area: Financial Management;
Program Activity: Pre-filing: [Empty];
Program Activity: Filing: [Empty];
Program Activity: Compliance: [Empty];
Program Activity: Research & SOI: [Empty];
Program Activity: Information Services: [Empty];
Program Activity: Information Services Improvement Projects: [Empty];
Program Activity: Business Systems Modernization: [Empty];
Program Activity: EITC: [Empty]; Program Activity: Shared Services: [Empty];
Program Activity: General Management & Administration: [Check].
Management Challenge or High Risk Area: Security of the IRS'
Information Systems;
Program Activity: Pre-filing: [Empty];
Program Activity: Filing: [Empty]; Program Activity: Compliance: [Empty];
Program Activity: Research & SOI: [Empty];
Program Activity: Information Services: [Check];
Program Activity: Information Services Improvement Projects: [Empty];
Program Activity: Business Systems Modernization: [Empty];
Program Activity: EITC: [Empty];
Program Activity: Shared Services: [Empty];
Program Activity: General Management & Administration: [Empty].
Management Challenge or High Risk Area: Taxpayer Protection and
Rights;
Program Activity: Pre-filing: [Check];
Program Activity: Filing: [Check];
Program Activity: Compliance: [Check];
Program Activity: Research & SOI: [Empty];
Program Activity: Information Services: [Empty];
Program Activity: Information Services Improvement Projects: [Empty];
Program Activity: Business Systems Modernization: [Empty];
Program Activity: EITC: [Empty];
Program Activity: Shared Services: [Empty];
Program Activity: General Management &
Administration: [Empty].
Management Challenge or High Risk Area: Processing Returns &
Implementing Tax Law Changes During Filing Season;
Program Activity: Pre-filing: [Check];
Program Activity: Filing: [Check];
Program Activity: Compliance: [Empty];
Program Activity: Research & SOI: [Empty];
Program Activity: Information Services: [Empty];
Program Activity: Information Services Improvement Projects: [Empty];
Program Activity: Business Systems Modernization: [Empty];
Program Activity: EITC: [Empty];
Program Activity: Shared Services: [Empty];
Program Activity: General Management & Administration: [Empty].
Management Challenge or High Risk Area: Customer Service & Tax
Compliance Initiatives;
Program Activity: Pre-filing: [Check];
Program Activity: Filing: [Check];
Program Activity: Compliance: [Check];
Program Activity: Research & SOI: [Check];
Program Activity: Information Services: [Empty];
Program Activity: Information Services Improvement Projects: [Empty];
Program Activity: Business Systems Modernization: [Empty];
Program Activity: EITC: [Empty];
Program Activity: Shared Services: [Empty];
Program Activity: General Management & Administration: [Empty].
Management Challenge or High Risk Area: Providing Quality Customer
Service Operations;
Program Activity: Pre-filing: [Check];
Program Activity: Filing: [Check];
Program Activity: Compliance: [Check];
Program Activity: Research & SOI: [Check];
Program Activity: Information Services: [Empty];
Program Activity: Information Services Improvement Projects: [Empty];
Program Activity: Business Systems Modernization: [Empty];
Program Activity: EITC: [Empty];
Program Activity: Shared Services: [Empty];
Program Activity: General Management & Administration: [Empty].
Management Challenge or High Risk Area: Impact of Global Economy on
Tax Administration;
Program Activity: Pre-filing: [Check];
Program Activity: Filing: [Empty];
Program Activity: Compliance: [Check];
Program Activity: Research & SOI: [Empty];
Program Activity: Information Services: [Empty];
Program Activity: Information Services Improvement Projects: [Empty];
Program Activity: Business Systems Modernization: [Empty];
Program Activity: EITC: [Empty];
Program Activity: Shared Services: [Empty];
Program Activity: General Management & Administration: [Empty].
Management Challenge or High Risk Area: Modernization of the IRS-
Organizational Restructuring;
Program Activity: Pre-filing: [Check];
Program Activity: Filing: [Check];
Program Activity: Compliance: [Check];
Program Activity: Research & SOI: [Check];
Program Activity: Information Services: [Empty];
Program Activity: Information Services Improvement Projects: [Empty];
Program Activity: Business Systems Modernization: [Empty];
Program Activity: EITC: [Empty];
Program Activity: Shared Services: [Empty];
Program Activity: General Management & Administration: [Check].
Management Challenge or High Risk Area: Revenue Protection ”
Minimizing Tax Filing Fraud; Noncompliance with EITC;
Program Activity: Pre-filing: [Check];
Program Activity: Filing: [Check];
Program Activity: Compliance: [Check];
Program Activity: Research & SOI: [Empty];
Program Activity: Information Services: [Empty];
Program Activity: Information Services Improvement Projects: [Empty];
Program Activity: Business Systems Modernization: [Empty];
Program Activity: EITC: [Check];
Program Activity: Shared Services: [Empty];
Program Activity: General Management & Administration: [Empty].
Management Challenge or High Risk Area: Implementation of the
Government Performance & Results Act;
Program Activity: Pre-filing: [Empty];
Program Activity: Filing: [Empty];
Program Activity: Compliance: [Empty];
Program Activity: Research & SOI: [Empty];
Program Activity: Information Services: [Empty];
Program Activity: Information Services Improvement Projects: [Empty];
Program Activity: Business Systems Modernization: [Empty];
Program Activity: EITC: [Empty];
Program Activity: Shared Services: [Empty];
Program Activity: General Management & Administration: [Check].
Management Challenge or High Risk Area: Modernization of the IRS-
Technology Modernization;
Program Activity: Pre-filing: [Empty];
Program Activity: Filing: [Empty];
Program Activity: Compliance: [Empty];
Program Activity: Research & SOI: [Empty];
Program Activity: Information Services: [Empty];
Program Activity: Information Services Improvement Projects: [Empty];
Program Activity: Business Systems Modernization: [Check];
Program Activity: EITC: [Empty];
Program Activity: Shared Services: [Empty];
Program Activity: General Management & Administration: [Empty].
Management Challenge or High Risk Area: Collect Unpaid Taxes;
Program Activity: Pre-filing: [Check];
Program Activity: Filing: [Empty];
Program Activity: Compliance: [Check];
Program Activity: Research & SOI: [Empty];
Program Activity: Information Services: [Empty];
Program Activity: Information Services Improvement Projects: [Empty];
Program Activity: Business Systems Modernization: [Empty];
Program Activity: EITC: [Empty];
Program Activity: Shared Services: [Empty];
Program Activity: General Management & Administration: [Empty].
[End of table]
The following pages summarize each Management Challenge and High-Risk
area along with management actions completed in FY 2001. The issue
descriptions provided for these management challenges were drawn
directly from documents prepared by the TIGTA and GAO.
Financial Management:
Issue:
The IRS' current financial systems alone can not produce reliable
information necessary to prepare financial statements in accordance
with federal accounting standards. The data produced from the current
financial system has to be reconciled with other subsidiary systems to
produce reliable financial statements. Further, the current systems do
not comply with the requirements of the Federal Financial Management
Improvement Act (FFMIA). In addition, the current financial systems
can not provide reliable cost accounting information. While a balanced
measurement system could provide information on the results of
programs to improve customer service and increase compliance, the cost
of achieving these results must also be known. Without reliable cost
accounting information it is difficult to measure the effectiveness of
various tax collection and enforcement activities and to judge whether
resources are appropriately allocated among competing priorities.
Reliable cost-benefit performance information related to collection
and enforcement activities is also necessary to better assist Congress
in making informed funding decisions concerning the appropriate levels
and uses of resources.
FY 2001 Accomplishments:
A major initiative for FY 2001 was beginning the development of the
Integrated Financial System (IFS). This system is designed to address
material weaknesses in financial reporting and bring the IRS into
compliance with the Federal Financial Management Improvement Act
(FFMIA). The IFS will be deployed in two releases. Release 1 will
contain the core financial functionality (i.e., General Ledger, A/R,
NP, Funds Management, Cost Accounting, and Financial Reporting) as
well as budget formulation. Release 2 will provide for non-core
systems (i.e., fixed assets, travel, procurement). The requirements
phase of IFS was completed in October 2001, with the procurement of
the software targeted for April 2002. Deployment of Release 1 is
anticipated to be completed by October 2003 and Release 2 should be
completed by April 2005.
Security of the IRS Information Systems:
Issue:
Although computer security has measurably improved, computer security
control weaknesses continue to place automated systems and taxpayer
data at serious risks to both internal and external threats. As the
primary revenue collector for the United States, the IRS is a target
for both terrorists and hackers. This threat has increased over the
last few years with more interconnectivity of systems. Until stronger
security controls are in place over its information systems, tax-
processing operations remain vulnerable to disruption. Furthermore,
the sensitive taxpayer data maintained by IRS is at risk of being
disclosed to unauthorized individuals, modified and improperly used,
or destroyed, thereby unnecessarily exposing taxpayers to financial
crimes such as identity fraud.
FY 2001 Accomplishments:
The Service-Wide Security Office (formerly Security and Privacy
Oversight) has implemented programs with the goal of managing security
risks and the costs related to mitigating them, rather than just
reacting to individual incidents and audit findings. New escalated
threats realized in the recent terrorists incidents call for re-
evaluation of strategy and tactics. Service-Wide Security consists of
the following programs: Security Evaluation and Oversight, Cyber
Security Operations, and Modernization Security. It also manages
support to two executive-level security groups, the Technology
Security Committee and the Subcommittee on Security of the Financial
Management Controls Executive Steering Committee (FMCESC).
The Office of Security Evaluation and Oversight (SEO) conducted
intensive, on-site reviews encompassing physical, personnel and
logical security of all IRS critical assets to identify security
weaknesses at the sites and worked with local and Headquarters staff
and management to develop corrective action plans. In addition, SEO
initiated improvements to computing center physical security targeted
to Department of Justice Level V, and provided training in responding
to chemical and biological threats at all ten campuses. The SEO also
completed secure configuration standards for major IRS platforms,
including Windows NT, Unix, and updated International Business
Machines/Resource Access Control Facility (IBM/RACF) guidance. The SEO
also worked with Information Technology Services (ITS) to mitigate
serious weaknesses in the electronic filing system. The SEO was
responsible for development and implementation of user-friendly
improvements to the IDRS program that resulted in user-generated
passwords and single sign-on capabilities.
The SEO worked with the Wage and Investment (W&I) Division to mitigate
weaknesses in remittance processing operations nationwide and through
the FMCESC Security Subcommittee provided leadership for establishing
improved security standards at lock box operations.
The Office of Cyber Security Operations leveraged expertise available
through contractors and internal resources to establish a 24/7
incident response capability. In addition, Cyber Security is
developing situation management centers that will support centralized
response to incidents and larger disruptions. In FY 2001 the Cyber
Security Office initiated and continues to develop a centralized
approach to security awareness activity, including a strong program of
awareness about unauthorized access to taxpayer information (UNAX).
Cyber Security Operations made improvements to the sensitive system
certification process through an automated tool that reduces the
burden of developing certification documentation by system owners.
Additionally, the Office developed a security assessment framework,
based on the CIO Council Information Technology Security Assessment
Framework (ITSAF) and National Institute of Standards & Technology
(NIST) guidance, which identifies security targets and metrics for
achieving security objectives. The Treasury Department adopted this
framework as a best practice for all its bureaus.
An Office of Modernization Security is in development to provide
direct support to the Business Systems Modernization and PRIME
Contractor organizations to ensure that security is adequately
addressed in the Enterprise Architecture Life Cycle and each
modernization project in FY 2002.
In the weeks following the September 11 terrorist attacks, we
conducted a security assessment of all IRS facilities. Aided by
security experts, we determined what immediate steps needed to be
taken, such as screening and guard services. In addition, we will
establish a consistent security standard for key areas such as
screening employees, identification badges and parking access.
Given the enormous volume of mail that the IRS handles, we are
concerned about hazardous materials threats. As recommended by the
Centers for Disease Control, we arranged for all employees throughout
the country who handle mail to have available masks and gloves that
meet or exceed recommended standards. In addition, we are taking
measures to limit employees' exposure to any hazardous substances and,
in the event that a hazardous substance is suspected or identified,
contain it in one place. We are committed to taking whatever actions
are necessary to protect our employees' health and safety as well as
the integrity of our tax administration system, especially during the
2002 filing season.
Modernization of the IRS ” Technology Modernization:
Issue:
The ability to balance the goals of helping taxpayers meet their tax
responsibility and improving overall compliance with tax laws depends
on the successful completion of the modernization effort.
Modernization of technology is crucial to implementing the new
business vision of providing world-class service to taxpayers. While
the development of new technology evolves, existing operations must
continue, and improvements must be made to meet the needs of tax
administration and demonstrate to taxpayers the IRS' commitment to
improved service.
FY 2001 Accomplishments:
IRS completed the IRS Enterprise Architecture 1.0, or Blueprint 2000,
which gives the service the ability to ensure that modernized projects
are coordinated across the entire IRS enterprise, producing an
integrated and unified set of systems, scoped to eliminate
duplication. IRS also put the first two business applications,
Customer Communications FY 2001 (CC01) and Customer Relationship
Management Exam (CRM Exam) into service and all related projects are
making progress in their development lifecycle. In FY 2001 the
Business System Modernization Office completed high-level strategies
for tax administration (Tax Administration Vision and Strategy ” TAVS)
and internal management (Internal Management Vision and Strategy ”
IMVS), and approved the comprehensive Enterprise Architecture. As the
modernization efforts continue, projects will all flow from one of
three foundation strategic architecture components. During FY 2001,
the IRS made significant progress in improving overall management of
its modernization efforts by further refining the configuration and
release management processes and establishing financial controls and
portfolio management to better align funding and resources with its
business priorities.
Implementation of the Government Performance & Results Act (GPRA) of
1993:
Issue:
The IRS Strategic Plan and Budget, which includes the Annual
Performance Plan and Annual Performance Report, satisfies a major
requirement of the Government Performance & Results Act (GPRA). It
will take several years to achieve a fully acceptable set of balanced
measures that can be used at all levels of the organization. Balanced
measures are being aligned with the employee performance evaluation
system to clearly link the work of individual managers and employees
to the mission and goals. Additionally, the effectiveness of
compliance improvement initiatives and current compliance levels
cannot be accurately determined until a measure of taxpayer's
voluntary compliance is developed.
FY 2001 Accomplishments:
Balanced measures, including those needed to address quality for many
compliance areas, that were identified during the FY 2003 Strategic
Planning Process continued to be developed in FY 2001. Balanced
Measures were also developed at the strategic management level and
reporting mechanisms for FY 2002 have been implemented. In addition,
each of the divisions has begun the task of drilling down into their
organization targets/goals for key performance measures. Beginning in
FY 2002 Strategic measures will be used along with the critical
measures to assess the IRS' overall performance in delivering its
mission and strategic goals. Development of the strategic measures for
voluntary compliance, burden, overall productivity, and overall
customer satisfaction was completed in FY 2001. Consideration is also
being given to development of an additional strategic measure to
address the need to report on the portion of "Potentially Collectible
Inventory" in the organization. Modernization of the current Executive
Management Support System was completed to meet interim needs of the
service in the area of balanced measures reporting. This new web-based
system will also interface with the joint WI & SBSE data mart to
automate data reporting for a majority of the critical and non-
critical performance measures. In FY 2001 the service completed
alignment of the IRS Performance Management System (Appraisals) with
the IRS Mission and Strategic Goals for all managers and has tied the
mission and goals to critical job elements for a significant portion
of the positions at the employee level. This effort will continue
through FY 2002 until all of the service's positions have been tied to
the mission and goals of the service.
Taxpayer Protection and Rights:
Issue:
The legislative changes required by the Restructuring and Reform Act
of 1998 (RRA 98) continue to have a profound impact. Most RRA 98
provisions, including massive training programs for thousands of
employees, have been modified or implemented. These reforms will be
tested over the next 2 years. During this time, significant management
attention will be required to evaluate the effectiveness of the
reforms.
FY 2001 Accomplishments:
The IRS, in conjunction with Treasury Tax Policy, has drafted
legislative changes to Section 1203 to moderate its effect. The
National Treasury Employees Union is in agreement with the changes and
appropriate Congressional Staff Members have been briefed. The staff
to the Senate Committee on Finance has asked the GAO to conduct an
independent study of the effects of 1203 and provide recommendations
to the Committee. The IRS awaits the results of the GAO's study.
In FY 2001, quarterly reviews and certifications were completed along
with implementation of training programs to reinforce the reforms
outlined in RRA 98.
For the taxpayer, a new Checkbox Designation feature was developed and
implemented that allows the taxpayer to designate a third party
authorization on any Form 1040 series return.
Processing Returns & Implementing Tax Law Changes during the Filing
Season:
Issue:
The filing season impacts every American taxpayer and is, therefore,
always a highly critical program. Many programs, activities and
resources have to be planned and managed effectively for the filing
season to be successful. Critical programming changes for the filing
season must receive priority over other programming requests. As part
of modernization and workload transition efforts, the ten processing
centers are undergoing a transition whereby eight centers will process
only individual tax returns, while two will process only business
returns. At the same time, partnership returns (Forms 1065) and
related Schedules K-1 for partnerships with more than 100 partners
will begin being processed electronically.
FY 2001 Accomplishments:
While major legislation (tax rebate) occurred in 2001 it did not
happen during the traditional Jan. ” June period thought of as the
filing season and is addressed in the accomplishments area of this
document. However, the IRS did deliver a successful filing season in
2001. Total revenue collected was $2.1 trillion. We processed over 130
million individual returns, and issued over 92 million refunds. IRS
representatives also met with 9.4 million taxpayers and we answered
108 million telephone calls and responded to 19.2 million letters. The
sheer size of the numbers is just one indicator of the complexity and
magnitude of our task.
Since 1998, we provided extended hours of telephone service during the
filing season. We also put on more assistors at peak hours, rather
than just during normal business hours. As mentioned, almost 108
million taxpayers called on one of our toll-free lines during FY 2001.
We received 76 million automated and Teletax calls, and our live
assistors handled 32 million taxpayer calls. Our San Patrick), Puerto
Rico call site became fully operational in 2001 and will greatly
assist us in providing better access and service to Spanish-speaking
taxpayers.
Busy signals in FY 2001 averaged only 2.3 percent of calls. Nearly all
callers now have almost immediate access to automated services,
although some callers are forced to wait longer to receive assistor
service. During the 2001 filing season, taxpayers that wanted to reach
an assistor were successful 62.1 percentage of time, often requiring
them to call back. Although this was an improvement over the previous
year, these wait times are still unacceptable to both taxpayers and
the IRS. We are using every method at our disposal, including modern
technology, to address them.
In addition, we added 23 additional forms to the 1040-e-file program.
And we will achieve a major milestone in the 2002 filing season ”
virtually all 1040 forms and schedules can be filed electronically and
no paper signature document is required. We will also expand the
electronic payment options available to taxpayers by accepting credit
cards to pay installment agreements and delinquent taxes. In addition,
we will repeat a popular option from the 2001 filing season. Taxpayers
who need a filing extension can get one automatically by making a
simple phone call.
In 2001, we also better served the business community's Electronic Tax
Administration needs. In September we introduced Electronic Federal
Tax Payment System (EFTPS) OnLine, which allows businesses to enroll
in the system, securely make federal tax payments and check their
electronic payment history over the Internet. And businesses can now
file on-line their Form 941 (Employers Quarterly Federal Tax Return),
as well as Form 1065 (Reporting Partnership Income) and Form 940
(Employers Annual Federal Unemployment Tax Return). Individual
taxpayers that make quarterly estimated tax payments could also use
the system, eliminating paper forms and receiving on-line access to
payment history.
The Internet proved to be an enormous growth area for ETA. Taxpayer
use of our web site surpassed all records. Four years ago, irs.gov
received 260 million hits. In FY 2001, we posted 2.6 billion hits with
more than 103 million forms and publications downloaded. In 2001, we
also launched the Small Business and Self-Employed Community web page.
It is devoted to the needs of this important group of taxpayers who
often confront more complex tax issues than those who have their taxes
withheld by an employer. And in 2002, we will unveil a revamped IRS
web site that takes us from being an information-only portal to a
world-class transaction based gateway.
Customer Service & Tax Compliance Initiatives:
Issue:
Business processes and technology have been re-engineered to focus on
providing world-class service to taxpayers. Resources allocated to
compliance activities decreased and as a result, revenue collected
decreased by $5 billion and gross accounts receivable increased by $41
billion.
FY 2001 Accomplishments:
A government-wide survey released in December 2001 showed improved
customer satisfaction among individual taxpayers, especially among
those who file their returns electronically. The IRS posted an 11
percent increase in satisfaction among all individual tax filers since
2000 and a 22 percent increase since 1999. It was the largest
favorable gain of the 30 federal agencies surveyed by the American
Customer Satisfaction Index (ACSI).
One of the important reasons for the strong showing in the ACSI survey
was the very high satisfaction rate among electronic filers. It was
77.2 points ” higher than the previous year and nearly seven points
higher than the national score for private sector services. It was the
third year in a row that taxpayers using IRS e-file expressed
increased satisfaction.
Providing Quality Customer Service Operations:
Issue:
In an effort to better serve taxpayers, management of the toll-free
telephone system was centralized; hours of operation were expanded;
significant enforcement resources were committed to answering
telephones and a significant investment in new technology was made. In
spite of these efforts, the level of customer demand on toll-free
telephone lines during the 1999 filing season could not be
satisfactorily managed. In addition to providing better telephone
service, face-to-face service remains an important part of providing
quality customer service.
FY 2001 Accomplishments:
IRS enhanced the Intelligent Call routing system to increase the
number of calls handled in an automated environment and to route calls
to sites dedicated to specific types of work. We also upgraded field
assistance sites to offer evening and weekend hours and multilingual
translation services. Taxpayer Resolution Representatives have been
trained to provide end-to-end services to individual taxpayers. In
addition, the number of frontline employees, specialized agent groups
and interpretive services were increased. In FY 2001 IRS established
an all Spanish" customer service site in Puerto Rico and we have plans
to add quality reviewers to the site in FY 2002. In the electronic
environment we increased the availability and accessibility of
electronic products and services by better tailoring and targeting our
market strategies to specific customer needs and expanding e-file
options. Educational and outreach programs were tailored to specific
customer needs with easy self-help options.
Impact of Global Economy on Tax Administration:
Issue:
The global economy is rapidly growing and generating increasingly
sophisticated business transactions. Acceleration of world trade and e-
commerce in the business world exceeds the government's capacity to
administer taxes. Significant improvements are needed in international
compliance programs to focus on non-filing, transfers of assets by
U.S. citizens to foreign trusts, foreign tax credit claims, and
foreign-source income. Customer service and compliance programs,
including pre and post filing, are being developed to meet the tax
administration needs of this expanding customer segment.
FY 2001 Accomplishments:
Partnerships were formed with key internal and external stakeholders
to address issues and provide guidance to the customer population. The
Understanding Multinational Project was used for representatives from
three partner countries (Australia, United Kingdom and Canada); the
U.S. steering committee and technical advisors to discuss joint
initiatives and data/issue analysis. The project provides training
courses in technical, investigative and managerial areas in the U.S.,
and foreign countries in conjunction with international organizations.
A Border Compliance Meeting was conducted for technical advisors,
territory managers, the revenue service representative from Mexico,
and members of the Strategy, Research and Program Planning staff to
discuss technical issues and establish an industry exchange meeting on
the Food and Agricultural Industry Segment related to border issues.
Qualified Intermediary (QI) agreements were executed with foreign
banking institutions and QI-EIN numbers were assigned prior to the
January 1st effective date of the new section 1441 withholding tax
regulation. Working relationship with Federal Trade Commission and
Securities and Exchange Commission were established to address the
issue of Internet Identification. In addition, the new foreign
withholding tax regime was implemented timely, including ensuring that
foreign financial institutions meet requirements for renewal of QI
agreements and qualified intermediaries comply with the terms of their
QI agreements.
Modernization of the Internal Revenue Service ” Organizational
Restructuring:
Issue:
The ability to balance the goals of helping taxpayers comply with tax
laws and improving overall compliance depends on successful
modernization. This modernization effort encompasses every facet of
operations, including the organizational structure. On October 1,
2000, a new organizational structure was put in effect to better meet
taxpayer needs and to provide an improved work environment. However,
the standup of the new organizational units is far from the last step
in the modernization process, business practices must also be revamped
to better meet taxpayer needs.
FY 2001 Accomplishments:
Following RRA 98's directions, we designed and made substantial
progress in implementing a new modernized IRS organized around
customers with similar needs. The new organization focuses on
providing service in three key program areas: pre-filing, filing, and
compliance. The modernized IRS organization was officially
inaugurated, or "stood up", on October 1, 2000. The final stages of
implementation, including the redistribution of workload, will require
another year through FY 2002.
Revenue Protection ” Minimizing Tax Filling Fraud; Noncompliance with
EITC:
Issue:
Subsequent to studies showing billions of dollars of Earned Income Tax
Credit (EITC) noncompliance, Congress provided additional funding and
enforcement tools to improve EITC compliance. In 1998, a five-year
EITC compliance initiative directed at the major sources of EITC
noncompliance was initiated. As a result, the number of EITC-related
errors involving social security numbers had been reduced and millions
of dollars in erroneous EITC claims have been stopped. However, there
is still an unknown portion of erroneous EITC refunds that are likely
attributable to factors other than fraud. Achieving full participation
by eligible taxpayers; ensuring compliance through verification of
taxpayers' eligibility; and, reducing inherent vulnerabilities
(multiple use of dependent Social Security Numbers) continue to be
high-risk areas. Additionally, despite extensive programs and efforts
to detect and stop fraudulent claims, the ability to systemically
identify refund schemes involving business returns and associated
credits remains a challenge.
FY 2001 Accomplishments:
Mitigation of risk associated with minimizing tax filing fraud in the
Earned Income Tax Credit (EITC) area were accomplished by
implementation of a three-part strategy. This strategy includes
education and outreach visits to offices with a high volume of EITC
return preparers, visits by agents to review compliance with due
diligence requirements, and "partnering" with Criminal Investigation
to ensure investigation of known fraudulent EITC claims and schemes.
The IRS also began a check of secondary social security and
identification numbers associated with a qualifying child to reduce
the number and amount of ineligible claims made under EITC to address
erroneous refunds and compliance among taxpayers who claim the Earned
Income Tax Credit (EITC). Future efforts in this area will focus on
system changes to implement further EITC validation and compliance
requirements. Also in 2001, the IRS issued two nationwide alerts and
established a web section to alert taxpayers and practitioners not to
fall victim to fraud and tax schemes that seem "to good to be true."
They range from tax credits or refunds related to reparations for
slavery to illegal ways to "untax" yourself. On November 15, 2001, the
Justice Department filed lawsuits in federal courts in three states to
crack down on one of these frivolous and bogus scams that claimed that
Section 861 of the tax code exempts from taxation all domestic income
earned by U.S. citizens.
In addition, in FY 2002, we will continue to emphasize improved
compliance with the Earned Income Tax Credit (EITC) provisions of the
tax code. Key to our efforts is the use of the Dependent Database
(DDB). Using data provided by the Department of Health and Human
Services and Social Security Administration, it is designed to
identify potential non-compliant returns during returns processing.
For example, when a child's Social Security Number is used on multiple
returns, the database helps determine which taxpayer is likely to
erroneously claim tax benefits on behalf of that child. We will also
move beyond testing to using the DDB application nationwide as part of
our Examination Program and for the identification of noncompliant
taxpayers and paid preparers.
Collect Unpaid Taxes:
Issue:
Reliable and timely financial, operational and compliance data is not
available to help target efforts to collect billions of dollars in
unpaid taxes. As a result, the federal government is exposed to
significant losses of tax revenue and compliant taxpayers bear an
undue burden of financing the government's activities. While
proceeding with modernization efforts, some key collection actions
such as levies and seizures have declined since 1997. These declines
may increase the incentives for taxpayers to either not report or
underreport their tax obligations. Attempts to identify taxpayers that
have not paid the taxes they owe are made through various enforcement
programs. The IRS' inability to fully pursue such cases is
attributable to a decrease in staff, reassignment of collection
employees to support customer service activities, and additional staff
time needed to implement certain taxpayer protections that were
included in the IRS Reform and Restructuring Act of 1998.
Additionally, inadequate financial and operational information has
hindered development of cost-based performance information for tax
collection and enforcement programs.
FY 2001 Accomplishments:
Accomplishments in this area are outlined in the section entitled Post-
Filing Compliance Services and can be found on page 6.
5. Financial Statements and Stewardship Information Analysis:
Overview of Revenue and Administrative Accounts:
The IRS' financial statements and footnotes received an unqualified
audit opinion for the second consecutive year for administrative
accounts and the fifth consecutive year for revenue accounts.
Administrative accounts reflect resources used and expenses incurred
in administering the tax laws. Revenue accounts reflect net taxes
receivable and taxes collected to support the federal government.
The Balance Sheet reflects total assets of $25.24 billion. Of these
assets, almost 79 percent are Federal Taxes Receivable. These
receivables are the amounts expected to be collected from past due
accounts. The decrease in assets of $1.37 billion is mainly
attributable to a decrease in Federal Taxes Receivable. The majority
of the liabilities, a little over 85 percent, consist of Federal Taxes
Receivable due to Treasury.
The Statement of Custodial Activity shows that IRS programs resulted
in $2.124 trillion in Federal receipts. IRS collections constitute 96
percent of the Federal Government receipts, as shown in the following
chart.
Figure: Total Federal Receipts:
[Refer to PDF for image: pie-chart]
IRS Collections: 96%;
Non-IRS Collections: 4%.
[End of figure]
Federal tax revenues are collected through six major classifications:
individual income; corporate income; excise taxes; estate and gift
taxes; railroad retirement; and, Federal unemployment taxes.
Individual income taxes, which include FICA and SECA taxes, increased
by 4.5 percent. Corporate income taxes decreased by 20.9 percent.
Collections from all other tax sources were relatively stable from
2000 to 2001. The entire amount of Federal revenue received in 2001
was distributed to Treasury.
Federal tax refunds, which include tax, interest, the special tax
rebate authorization, payments for Earned Income Tax Credits and Child
Tax Credits in excess of the tax liability were $251 billion.
Financing Sources:
The IRS receives the majority of its funding through annual, multi-
year, no-year and trust fund appropriations which are available for
use within certain specified statutory limits. There are three major
and several minor operating appropriations. The Processing, Assistance
and Management appropriation funds the processing of tax returns and
related documents, assistance for taxpayers in the filing of their
returns and paying taxes due, matching information with returns,
conducting internal audit reviews and security investigations, and
managing financial resources. The Tax Law Enforcement appropriation
provides funds for the examination of tax returns and the
administrative and judicial settlement of taxpayer appeals of
examination findings. The Information Services appropriation funds
costs for data processing and information and telecommunications
support for the Service's activities. The Investment Technology
Investment Account and the Earned Income Tax Credit appropriations are
the most significant of the minor operating appropriations. The former
funds capital asset acquisitions of information technology systems.
The latter provides resources for expanded customer service and
outreach, strengthened enforcement, and enhanced research to reduce
claims and erroneous filings associated with the Earned Income Tax
Credit.
Figure: Budget Fiscal Year 2001 Appropriations (Percent):
[Refer to PDF for image: pie-chart]
Processing, Assistance, and Management (PAM): 41.16%; Tax Law
Enforcement (TLE): 37.82%; Information Services (IS): 17.63%;
Information Technology Investment Account (ITIA): 1.81%; Earned Income
Tax Credit (EITC): 1.59%.
[End of figure]
Besides appropriations, the Service utilizes other financing sources.
These include net transfers from other federal agencies, and imputed
financing (subsidies from other federal funds that pay for specific
items such as payments for retirement benefits).
Use of Resources:
The Statement of Net Cost reflects the use of resources in carrying
out the agency's major programs. The major programs are Pre-filing,
Filing and Account Services, Compliance, and Administration of the
Earned Income Tax Credit (EITC). Pre-filing activities include
taxpayer education and outreach, pre-filing agreements, and tax
publication issuance and distribution. Filing and account services
activities include the filing of tax returns, current account status,
and processing of taxpayer information. Compliance activities include
document matching, audits, and criminal investigation activities.
Administration of the EITC activities includes pre-filing, filing and
account services, and compliance activities.
Figure: How the Service Used Its Resources (in Percent):
[Refer to PDF for image: pie-chart]
Compliance Services: 58.36%;
Filing and Account Services: 33.18%; Pre-Filing Taxpayer Assistance
and Education: 5.72%; Administration of Earned Income Tax Credit:
2.75%.
[End of figure]
Most Unpaid Assessments Are Not Receivables And Are Largely
Uncollectible:
As reflected in the supplemental information to IRS' fiscal year 2001
Financial Statements, the unpaid assessment balance was about $239
billion as of September 30, 2001. This unpaid assessment balance
represents assessments resulting from taxpayers filing returns without
sufficient payment; as well as from the Service's enforcement programs
such as Examination, Underreporter, Substitute for Return, and
Combined Annual Wage Reporting. A significant portion of this balance
is not considered a receivable. In addition, a substantial portion of
the amounts considered receivables is largely uncollectible.
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 with little or no future collection potential
are called write-offs.
Figure 1 depicts the components of the unpaid assessments balance as
of September 30, 2001.
Figure 1: Components of IRS' $239 Billion of Unpaid Assessments:
[Refer to PDF for image: pie-chart]
Write Off ($137 billion): 57%;
Taxes Receivable ($80 billion): 34%; Compliance ($22 billion): 9%.
[End of figure]
Of the $239 billion balance of unpaid assessments, $137 billion
represents write-offs. Write-offs principally consist of amounts owed
by defunct taxpayer's and includes many failed financial institutions
resolved by the Federal Deposit Insurance Corporation (FDIC) and the
former Resolution Trust Corporation (RTC). The remaining amounts are
owed by taxpayers with extreme economic and/or financial hardships,
deceased taxpayers, and taxpayers who are insolvent due to bankruptcy.
Figure 2 depicts the components of the write off balance as of
September 30, 2001.
Figure 2: Components of IRS' $137 Billion of Write offs:
[Refer to PDF for image: pie-chart]
Defunct Corporation: 33%;
FDIC/RTC: 24%;
Financial Hardship: 18%;
Other: 11%;
Unable to Locate: 6%;
Insolvent/Bankrupt: 5%;
Deceased: 3%.
[End of figure]
In addition, $22 billion of unpaid assessments represent amounts that
have not been agreed to by either the taxpayer or a court. These
assessments result primarily from various Service enforcement programs
to promote voluntary compliance. Due to the lack of agreement, these
compliance assessments have less potential for future collection than
the unpaid assessments that are considered federal taxes receivable.
The remaining $80 billion of unpaid assessments represent federal
taxes receivable. About $60 billion (75%) of this balance is estimated
to be uncollectible due primarily to the taxpayer's economic
situation, including individual taxpayers who are unemployed, are
currently in bankruptcy, or have other financial problems. However,
under certain conditions, IRS may continue collection action for 10
years after the assessment. Thus, these accounts may still ultimately
have some collection potential if the taxpayer's economic condition
improves.
About $20 billion, or about 25%, of federal taxes receivable is
estimated to be collectible. Components of the collectible balance
include installment agreements with estates and individuals, confirmed
payment plans through bankruptcy, and some newer amounts due from
individuals and businesses with a history of compliance. The taxes
receivable amount from September 30, 2000, to September 30, 2001,
decreased $1 billion, from $81 billion to $80 billion. The percent
estimated to be collectible at September 30, 2001 (25%), decreased
from September 30, 2000 (27%).
Figure 3 depicts the taxes receivable balance that is considered
collectible and uncollectible as of September 30, 2001.
Figure 3: Components of IRS' $80 Billion of Taxes Receivable:
[Refer to PDF for image: pie-chart]
Taxes Receivable - Uncollectible ($60): 75%; Taxes Receivable -
Collectible ($20): 25%.
[End of figure]
It is also important to note that the unpaid assessment balance
contains unpaid assessed tax, penalty, and interest, and accrued
penalty and interest computed through September 30, 2001. About $158
billion (66%) of the unpaid assessment balance as of September 30,
2001, contains interest and penalties, as depicted in Figure 4, and
are largely uncollectible.
Figure 4 depicts the Unpaid Taxes and Interest and Penalty Components
as of September 30, 2001.
Figure 4: Unpaid Taxes and Interest and Penalty Components of $239
Billion in Unpaid Assessments:
[Refer to PDF for image: pie-chart]
Interest & Penalties ($158): 66%; Taxes ($81): 34%.
[End of figure]
Interest and penalties are such a high percentage of the balance
because IRS must continue to accrue them through the 10-year statutory
collection date, regardless of whether an account meets the criteria
for financial statement recognition or has any collection potential.
For example, interest and penalties continue to accrue on write-offs,
such as FDIC and RTC cases, and on exam assessments where taxpayers
have not agreed to the amount assessed. The overall growth in unpaid
assessments during FY 2001 was mostly attributable to the accrual of
interest and penalties.
6. Performance Goals, Objectives and Results:
Critical Measures/Indicators:
The critical measures/indicators were selected by the IRS Commissioner
as measurements of performance representing taxpayer facing
activities. For FY 2001, the critical measures/indicators represent
the agency at the strategic level and will be complemented by the IRS
strategic measures in FY 2002. Experience has shown that development
of performance measures continues to be an evolving process that
improves with time. Beginning in FY 2002, the list of critical
measures/indicators will be revised to include additional measures/
indicators to more fully represent key processes and program areas.
The FY 2001 critical measures/indicators replace the key performance
indicators displayed in the FY 2000 IRS Annual Report's Management
Discussion and Analysis (MD&A). In addition, FY 1999 historical
information is now provided to present a more complete historical
picture of performance.
Table:
Pre-Filing Services ” Assisting Taxpayers in Understanding their Tax
Responsibilities and Preparing Accurate Returns:
Agency-Wide Operational Performance Measures: 1. EP/EO Determination
Letters;
Fiscal Year Performance, FY 1999 Actual: 114,598;
Fiscal Year Performance, FY 2000 Actual: 109,461;
Fiscal Year Performance, FY 2001 Actual: 109,326;
Fiscal Year Performance, FY 2001 Plan: 121,000.
Agency-Wide Operational Performance Measures: 2. Private Letter
Rulings Completed;
Fiscal Year Performance, FY 1999 Actual: [Empty];
Fiscal Year Performance, FY 2000 Actual: 1,913;
Fiscal Year Performance, FY 2001 Actual: 2,428;
Fiscal Year Performance, FY 2001 Plan: 1,920.
Agency-Wide Operational Performance Measures: 3. Taxpayer Advocacy
Projects;
Fiscal Year Performance, FY 1999 Actual: [Empty];
Fiscal Year Performance, FY 2000 Actual: 88;
Fiscal Year Performance, FY 2001 Actual: 92;
Fiscal Year Performance, FY 2001 Plan: 88.
Filing Services - Assisting Taxpayers in Filing Returns, Receiving
Refunds, Making Payments and Resolving Questions about their Accounts:
Agency-Wide Operational Performance Measures: 4. Percent Individual
Returns Filed Electronically;
Fiscal Year Performance, FY 1999 Actual: 23.4%;
Fiscal Year Performance, FY 2000 Actual: 27.8%;
Fiscal Year Performance, FY 2001 Actual: 30.7%;
Fiscal Year Performance, FY 2001 Plan: 32.6%.
Agency-Wide Operational Performance Measures: 5. Elect Fed Tax
Payments System (millions);
Fiscal Year Performance, FY 1999 Actual: 55.3;
Fiscal Year Performance, FY 2000 Actual: 63.4;
Fiscal Year Performance, FY 2001 Actual: 64.4;
Fiscal Year Performance, FY 2001 Plan: 67.5.
Toll-Free Telephone Service Effectiveness:
Agency-Wide Operational Performance Measures: 6. Toll-Free Customer
Satisfaction (4 point scale);
Fiscal Year Performance, FY 1999 Actual: 3.50;
Fiscal Year Performance, FY 2000 Actual: 3.50;
Fiscal Year Performance, FY 2001 Actual: 3.45;
Fiscal Year Performance, FY 2001 Plan: 3.58.
Agency-Wide Operational Performance Measures: 7. Toll-Free Level of
Service;
Fiscal Year Performance, FY 1999 Actual: [Empty];
Fiscal Year Performance, FY 2000 Actual: 59%;
Fiscal Year Performance, FY 2001 Actual: 56%;
Fiscal Year Performance, FY 2001 Plan: 63%;
Agency-Wide Operational Performance Measures: 8. Toll-Free Tax Law
Quality;
Fiscal Year Performance, FY 1999 Actual: 74%;
Fiscal Year Performance, FY 2000 Actual: 73%;
Fiscal Year Performance, FY 2001 Actual: 75%;
Fiscal Year Performance, FY 2001 Plan: 74%.
Agency-Wide Operational Performance Measures: 9. Toll-Free Account
Quality;
Fiscal Year Performance, FY 1999 Actual: 82%;
Fiscal Year Performance, FY 2000 Actual: 60%;
Fiscal Year Performance, FY 2001 Actual: 69%;
Fiscal Year Performance, FY 2001 Plan: 63%.
In-Person Assistance to Taxpayers:
Agency-Wide Operational Performance Measures: 10. Customer
Satisfaction-Walk In (7 point scale);
Fiscal Year Performance, FY 1999 Actual: 6.43;
Fiscal Year Performance, FY 2000 Actual: 6.50;
Fiscal Year Performance, FY 2001 Actual: 6.40;
Fiscal Year Performance, FY 2001 Plan: 6.50.
Post-Filing Compliance Services: -- Bringing Taxpayers into Compliance
with the Law:
Collection by Telephone:
Agency-Wide Operational Performance Measures: 11. Telephone Customer
Satisfaction-Automated Collection System (ACS) (4 point
scale);
Fiscal Year Performance, FY 1999 Actual: 3.32;
Fiscal Year Performance, FY 2000 Actual: 3.41;
Fiscal Year Performance, FY 2001 Actual: 3.46;
Fiscal Year Performance, FY 2001 Plan: 3.50.
Agency-Wide Operational Performance Measures: 12. ACS - Taxpayer
Delinquent Accounts Closed (Entities);
Fiscal Year Performance, FY 1999 Actual: 2,874,093;
Fiscal Year Performance, FY 2000 Actual: 1,052,221;
Fiscal Year Performance, FY 2001 Actual: 1,006,600;
Fiscal Year Performance, FY 2001 Plan: 1,087,400.
Agency-Wide Operational Performance Measures: 13. ACS - Taxpayer
Delinquent Investigations Closed (Entities);
Fiscal Year Performance, FY 1999 Actual: 1,828,885;
Fiscal Year Performance, FY 2000 Actual: 412,150;
Fiscal Year Performance, FY 2001 Actual: 297,791;
Fiscal Year Performance, FY 2001 Plan: 400,376.
Agency-Wide Operational Performance Measures: 14. ACS - Telephone
Level of Service;
Fiscal Year Performance, FY 1999 Actual: 81%;
Fiscal Year Performance, FY 2000 Actual: 79%;
Fiscal Year Performance, FY 2001 Actual: 77%;
Fiscal Year Performance, FY 2001 Plan: 80%.
In-Person Collection:
Agency-Wide Operational Performance Measures: 15. Customer
Satisfaction-Collection Field (7 point scale);
Fiscal Year Performance, FY 1999 Actual: 3.89;
Fiscal Year Performance, FY 2000 Actual: 4.60;
Fiscal Year Performance, FY 2001 Actual: 5.01;
Fiscal Year Performance, FY 2001 Plan: 4.94.
Agency-Wide Operational Performance Measures: 16. Field Coll. - # of
cases closed (TDA)(Modules);
Fiscal Year Performance, FY 1999 Actual: 951,984;
Fiscal Year Performance, FY 2000 Actual: 771,455;
Fiscal Year Performance, FY 2001 Actual: 757,392;
Fiscal Year Performance, FY 2001 Plan: 846,800.
Agency-Wide Operational Performance Measures: 17. Field Coll. - # of
cases closed (TDI) (Entities);
Fiscal Year Performance, FY 1999 Actual: 166,808;
Fiscal Year Performance, FY 2000 Actual: 144,764;
Fiscal Year Performance, FY 2001 Actual: 119,451;
Fiscal Year Performance, FY 2001 Plan: 146,211.
Agency-Wide Operational Performance Measures: 18. Field Collection
Quality;
Fiscal Year Performance, FY 1999 Actual: 86%;
Fiscal Year Performance, FY 2000 Actual: 84%;
Fiscal Year Performance, FY 2001 Actual: 84%;
Fiscal Year Performance, FY 2001 Plan: 86%.
Cases of Under or Over Reporting Identified through Document Matching:
Agency-Wide Operational Performance Measures: 19. Automated
Underreporter Closures;
Fiscal Year Performance, FY 1999 Actual: 3,367,086;
Fiscal Year Performance, FY 2000 Actual: 2,888,900;
Fiscal Year Performance, FY 2001 Actual: 2,511,424;
Fiscal Year Performance, FY 2001 Plan: 2,859,000.
Agency-Wide Operational Performance Measures: 20. Automated
Underreporter Quality;
Fiscal Year Performance, FY 1999 Actual: [Empty];
Fiscal Year Performance, FY 2000 Actual: 93%;
Fiscal Year Performance, FY 2001 Actual: 95%;
Fiscal Year Performance, FY 2001 Plan: 94%.
Examination of Returns Through Correspondence and Telephone:
Agency-Wide Operational Performance Measures: 21. Service Center
Exam - Customer Satisfaction (7 point scale);
Fiscal Year Performance, FY 1999 Actual: 3.87;
Fiscal Year Performance, FY 2000 Actual: 4.04;
Fiscal Year Performance, FY 2001 Actual: 4.18;
Fiscal Year Performance, FY 2001 Plan: 4.30.
Agency-Wide Operational Performance Measures: 22. Service Center
Exam - Number of Returns Examined;
Fiscal Year Performance, FY 1999 Actual: 1,302,700;
Fiscal Year Performance, FY 2000 Actual: 394,754;
Fiscal Year Performance, FY 2001 Actual: 650,376;
Fiscal Year Performance, FY 2001 Plan: 558,655.
Agency-Wide Operational Performance Measures: 23. Service Center Exam
Quality;
Fiscal Year Performance, FY 1999 Actual: 91%;
Fiscal Year Performance, FY 2000 Actual: 70%;
Fiscal Year Performance, FY 2001 Actual: 71%;
Fiscal Year Performance, FY 2001 Plan: 72%.
Examination of Returns In Person:
Agency-Wide Operational Performance Measures: 24. Field Exam -
Customer Satisfaction (7 point scale);
Fiscal Year Performance, FY 1999 Actual: 4.08;
Fiscal Year Performance, FY 2000 Actual: 4.41;
Fiscal Year Performance, FY 2001 Actual: 4.65;
Fiscal Year Performance, FY 2001 Plan: 4.60.
Agency-Wide Operational Performance Measures: 25. Individual Return
Examinations > $100,000;
Fiscal Year Performance, FY 1999 Actual: 94,638;
Fiscal Year Performance, FY 2000 Actual: 63,217;
Fiscal Year Performance, FY 2001 Actual: 50,827;
Fiscal Year Performance, FY 2001 Plan: 113,699.
Agency-Wide Operational Performance Measures: 26. Individual Return
Examinations < $100,000;
Fiscal Year Performance, FY 1999 Actual: 289,698;
Fiscal Year Performance, FY 2000 Actual: 187,891;
Fiscal Year Performance, FY 2001 Actual: 145,144;
Fiscal Year Performance, FY 2001 Plan: 152,964.
Agency-Wide Operational Performance Measures: 27. Total Returns
Examined;
Fiscal Year Performance, FY 1999 Actual: 384,336;
Fiscal Year Performance, FY 2000 Actual: 251,108;
Fiscal Year Performance, FY 2001 Actual: 195,971;
Fiscal Year Performance, FY 2001 Plan: 266,663.
Agency-Wide Operational Performance Measures: 28. Field Exam - Case
Quality Score;
Fiscal Year Performance, FY 1999 Actual: 65%;
Fiscal Year Performance, FY 2000 Actual: 58%;
Fiscal Year Performance, FY 2001 Actual: 70%;
Fiscal Year Performance, FY 2001 Plan: 60%.
Examination - Corporate Returns:
Agency-Wide Operational Performance Measures: 29. Number of Returns
Examined-General Industry;
Fiscal Year Performance, FY 1999 Actual: 137,893;
Fiscal Year Performance, FY 2000 Actual: 103,112;
Fiscal Year Performance, FY 2001 Actual: 84,748;
Fiscal Year Performance, FY 2001 Plan: 142,441.
Agency-Wide Operational Performance Measures: 30. Number of Cases
Examined (Large Case);
Fiscal Year Performance, FY 1999 Actual: 416;
Fiscal Year Performance, FY 2000 Actual: 369;
Fiscal Year Performance, FY 2001 Actual: 417;
Fiscal Year Performance, FY 2001 Plan: 475.
Agency-Wide Operational Performance Measures: 31. Number of Returns
Closed (Large Case);
Fiscal Year Performance, FY 1999 Actual: 3,807;
Fiscal Year Performance, FY 2000 Actual: 3,096;
Fiscal Year Performance, FY 2001 Actual: 3,710;
Fiscal Year Performance, FY 2001 Plan: 3,831.
Employee Plans and Exempt Organizations:
Agency-Wide Operational Performance Measures: 32. EP/E0 Customer
Satisfaction (7 point scale);
Fiscal Year Performance, FY 1999 Actual: 5.43;
Fiscal Year Performance, FY 2000 Actual: 5.71;
Fiscal Year Performance, FY 2001 Actual: 5.70;
Fiscal Year Performance, FY 2001 Plan: 5.70.
Agency-Wide Operational Performance Measures: 33. EP/E0 Examinations
Closed;
Fiscal Year Performance, FY 1999 Actual: 22,525;
Fiscal Year Performance, FY 2000 Actual: 19,080;
Fiscal Year Performance, FY 2001 Actual: 15,988;
Fiscal Year Performance, FY 2001 Plan: 19,300.
Agency-Wide Operational Performance Measures: 34. EP/E0 Examination
Quality;
Fiscal Year Performance, FY 1999 Actual: [Empty];
Fiscal Year Performance, FY 2000 Actual: 83%;
Fiscal Year Performance, FY 2001 Actual: 73%;
Fiscal Year Performance, FY 2001 Plan: 83%.
Appeals:
Agency-Wide Operational Performance Measures: 35. Appeals Cases
Closed;
Fiscal Year Performance, FY 1999 Actual: 61,507;
Fiscal Year Performance, FY 2000 Actual: 54,986;
Fiscal Year Performance, FY 2001 Actual: 54,748;
Fiscal Year Performance, FY 2001 Plan: 73,013.
Taxpayer Advocate Service (TAS):
Agency-Wide Operational Performance Measures: 36. TAS Closed Cases;
Fiscal Year Performance, FY 1999 Actual: 294,993;
Fiscal Year Performance, FY 2000 Actual: 237,885;
Fiscal Year Performance, FY 2001 Actual: 248,011;
Fiscal Year Performance, FY 2001 Plan: 244,941.
Agency-Wide Operational Performance Measures: 37. Casework Quality
Index;
Fiscal Year Performance, FY 1999 Actual: 79%;
Fiscal Year Performance, FY 2000 Actual: 65%;
Fiscal Year Performance, FY 2001 Actual: 72%;
Fiscal Year Performance, FY 2001 Plan: 68%.
General Administration:
Agency-Wide Operational Performance Measures: 38. Total Enforcement
Revenue (billions)[A];
Fiscal Year Performance, FY 1999 Actual: 32.90;
Fiscal Year Performance, FY 2000 Actual: 33.80;
Fiscal Year Performance, FY 2001 Actual: 33.78;
Fiscal Year Performance, FY 2001 Plan: 34.00.
Agency-Wide Operational Performance Measures: 39. Agency Wide Employee
Satisfaction;
Fiscal Year Performance, FY 1999 Actual: 55%;
Fiscal Year Performance, FY 2000 Actual: 59%;
Fiscal Year Performance, FY 2001 Actual: 51%;
Fiscal Year Performance, FY 2001 Plan: 60%.
Agency-Wide Operational Performance Measures: 40. FTE per Billion $
Real GDP[A];
Fiscal Year Performance, FY 1999 Actual: [Empty];
Fiscal Year Performance, FY 2000 Actual: 10.57;
Fiscal Year Performance, FY 2001 Actual: 10.26;
Fiscal Year Performance, FY 2001 Plan: 10.42.
[A] Identifies a Diagnostic Indicator.
[End of table]
7. A Performance Discussion Immediately Follows the Definition for All
Cases Where FY 2001 Performance Exceeded or Fell Below Plan by a Value
Greater or Less Than Ten Percent:
1. Employee Plans and Exempt Organization (EP/EO) Determination
Letters ” Cases established on the Tax-Exempt and Government Entities
(TE/GE) and EP/E0 Determination System and closed on that system
regardless of type of case or type of closing.
Performance Discussion: The planned number of determination case
disposals was predicated on the projected volume of application
receipts. The shortfall was primarily due to an unexpected decline in
receipts for plan amendments under new pension laws. Those receipts
are expected in the first quarter of FY 2002 and will increase both
receipts and cases closed for FY 2002. Determination closures were
slightly (less than 2%) below plan due to an increase in time applied
per case associated with new agent hires.
2. Private Letter Rulings Completed ” Total number of Private Letter
Rulings (PLRs) completed by the Office of the Chief Counsel. PLR's are
written statements that address specific, tax-related issues
pertaining to the taxpayer and the IRS about the tax treatment of
particular matters before a taxpayer's return is filed. These
techniques reduce taxpayer burden, eliminate controversy, and enhance
voluntary compliance, even before the taxpayer is involved. Private
Letter Ruling program is the largest single program in Chief Counsel.
3. Taxpayer Advocacy Projects ” Cumulative total of all Advocacy
Projects to date, by fiscal year. An Advocacy Project is an Operating
Division Taxpayer Advocate (ODTA) project in which an operational
issue is identified that adversely affects a group of taxpayers.
4. Percent of Individual Returns Filed Electronically ” The number of
electronically filed individual tax returns divided by the total
number of individual returns filed. Includes all returns where
electronic filing is permitted (Practitioner e-file, Telefile, VITA
[Volunteer Income Tax Assistance], On”Line Filing, Federal/State
returns, etc.)
5. Electronic Federal Tax Payments ” All individual and business tax
type payments made directly through the Electronic Federal Tax Payment
System (EFTPS), through IRS e-file, directly through payroll service
providers, or through credit card processors.
6. Toll-Free Customer Satisfaction ” Represents the customers' overall
level of satisfaction with the services provided by the IRS Toll-Free
program. Survey recipients are asked to rate IRS performance on a four-
point scale, where 1 indicates Very Dissatisfied and 4 indicates Very
Satisfied. Limitations on the survey data not affecting the
statistical validity include: only customers calling one of the IRS
toll-free telephone numbers are included in the sample. Calls are
selected based on a sampling pattern that includes variables for the
hour of day, day of week, and time of year. Customers calling when IRS
monitors are not available (Saturday, Sunday and some evening hours)
are excluded from the survey.
7. Toll Free Customer Service Representative (CSR) Level of Service ”
Reported as the percentage of taxpayers that are calling our toll-free
services and speak to an assistor. Factors used to arrive at the level
of service provided by assistors and taken into consideration in the
calculation: Callers selecting an automated application, receiving a
busy signal or abandoning while in queue waiting for an assistor. In
FY 2001, the methodology used to calculate results of this measure
were changed, however, historical data was re-calculated using the new
methodology in order to present a complete historical picture.
Performance Discussion: The level of service for the full fiscal year
was significantly affected by the large volume of calls during July,
August, and September due to the special advance refund, resulting in
longer wait times and a lower than planned assistor level of service
despite answering approximately the planned number of assistor calls.
During the filing season period, which ended before the special refund
calls began to come in, assistor level of service was at 64 percent an
increase of 5.13 percent from the 2000 filing season level. The fiscal
year variance from target was caused primarily by longer handle times
for account calls, which in turn is partly due to the diversion of
more simple calls to automated services.
8. Toll-Free Tax Law Quality ” The percentage of customers receiving
accurate responses to their Tax Law inquiries. This evaluates the
customer (external), administrative (internal) and regulatory accuracy
of this service.
9. Toll-Free Account Quality ” The percentage of customers receiving
accurate responses to their account inquiries. This evaluates the
customer (external), administrative (internal) and regulatory accuracy
of this service.
Performance Discussion: Increased attention placed on quality, and an
increase in the knowledge and experience of the Customer Account
Representatives as the year progressed were factors in the significant
increases in work quality in the account area.
10. Customer Satisfaction ” Walk-in ” Represents the customers'
overall level of satisfaction with the services provided by the IRS at
its Taxpayer Assistance Centers. The scores represent the average
overall level of customer satisfaction ("Keystone" question) from the
Customer Satisfaction transactional surveys. Survey recipients are
asked to rate IRS performance on a seven-point scale, where 1
indicates Very Dissatisfied and 7 indicates Very Satisfied.
11. Telephone Customer Satisfaction ” Automated Collection System
(ACS) ”Represents the customer's perception of IRS service received
through contact with employees in the Automated Collection System call
centers. Limitations on survey respondents not affecting the
statistical validity are as follows: ACS outgoing calls are not
included in the survey due to technological limitations, and customers
calling when IRS monitors are not available (Saturday, Sunday and some
evening hours) are excluded from the survey. In FY 2002 IRS will
implement customer satisfaction surveys at its call center site
dedicated to the Spanish-speaking community.
12. Automated Collection System Closures ” Taxpayer Delinquent
Accounts (TDA) ”Number of entity delinquent account closures produced
in the Automated Collection System. Entities closed using codes
related to systemic reduction of inventory are not included in the
actual count.
13. Automated Collection System Closures, Taxpayer Delinquent
Investigations (TDI) ”Number of entity delinquent investigation
closures produced in the Automated Collection System. Entities closed
using codes related to systemic reduction of inventory are not
included in the actual count.
Performance Discussion: The target was determined to be flawed after
identification of a systemic problem inflating the base used to
develop the FY 2001 goals. In addition, the need to provide staff to
answer the increased call volumes was a primary contributing factor to
the missed target as were delays in hiring and greater focus placed on
working the delinquent account inventory.
14. Automated Collection System -Telephone Level of Service ”
Percentage of calls attempted compared to the number of calls answered
by the next available assistor in the Automated Collection System call
centers. Calls which abandon after having been answered but while in
queue waiting for an assistor are not included in the count of calls
answered. Taxpayers who receive a busy signal while trying to reach a
call center are not factored into the calculation. In FY 2002 the
definition will be changed to mirror the definition for Toll-Free
Customer Service Representative (CSR) level of service and will
include factors such as busy signals.
15. Customer Satisfaction ” Collection Field ” Represents the
Customers' overall level of satisfaction with the way their cases were
handled by employees in the IRS Field Collection program. Scores
represent the average overall level of customer satisfaction
("Keystone" question) from the Customer Satisfaction transactional
surveys. Survey recipients are asked to rate IRS performance on a
seven-point scale, where 1 indicates Very Dissatisfied and 7 indicates
Very Satisfied. Limitations not affecting the statistical validity of
the sample include: sampling only those customers who owe money to the
IRS and have been referred to Collection are sampled. Additionally,
samples drawn from the Collection Quality Measurement System (CQMS)
database only include three types of closures; Currently Not
Collectible/Hardship, Installment Agreements, and Full Pays. The
sample does not include: cases with no case history, cases for
customers the IRS cannot locate, cases where the statute has expired,
bankruptcy cases, deceased taxpayers, and defunct or insolvent
corporations. For cases involving an Offer in Compromise, only those
offers that are accepted by the IRS are included. Upon conversion of
the Integrated Collection System (ICS) database the survey will be
expanded to include the entire range of Collection cases.
16. Field Collection, Number of Cases Closed Taxpayer Delinquent
Account (TDA) ” A count of the number of actual TDA dispositions
completed by field Revenue Officers on a monthly basis. A TDA
disposition arises on the Integrated Data Retrieval System (IDRS) when
the status of an account changes from an open status to any closed
status as defined in Section 8 (Document 6209 - Automated Data
Processing (ADP)/IDRS Information.) Data is reported as modules.
Performance Discussion: The top priority was to stem the long-term
decline in the TDA Taxpayer Delinquent Account (TDA) closures, which
were approximately level with closures in FY 2000. The number of
closures were impacted by a resource shift to work Offer In Compromise
cases, increased complexity of SB/SE inventory, Collection Due Process
procedures and additional process steps still in place from the
Restructuring and Reform Act of 1998.
17. Field Collection ” Number of Cases Closed Taxpayer Delinquent
Investigation (TDI) ” Count of the number of actual TDI dispositions
completed by field Revenue Officers on a monthly basis. A TDI
disposition arises on Integrated Data Retrieval System (IDRS) when the
status of an investigation changes from an open status to a closed
status (any) as defined in Section 8 of Document 6209 (Automated Data
Processing (ADP)/IDRS Information.) Data is reported as entities.
18. Field Collection Quality ” Score awarded to a reviewed Collection
case by a third-party reviewer using the Collection Quality
Measurement System (CQMS) quality standards. Each standard if met, has
a value. Values are totaled to arrive at the score with deductions in
the overall composite score for failure to meet a standard designated
as critical.
19. Automated Underreporter (AUR) Closures ” Total number of closures
of Automated Underreporter Cases.
Performance Discussion: A delay in starting the Tax Year 1999
inventory due to systemic problems, coupled with a reduction in the
number of immediate closures screened out on the front end of the
process (29% versus the planned 40%) contributed to an inventory shift
to more complex SB/SE cases and were direct contributors in failure to
meet the target.
20. Automated Underreporter (AUR) Quality ” Quality of all AUR account
actions as a result of taxpayer inquiries or internal requests.
Quality of casework in the undereporter area is performed on closed
cases only.
21. Service Center Examination Customer Satisfaction ” Represents the
level of satisfaction customers receive from interactions with the IRS
Service Center Examination services. Respondents are asked to rate the
IRS using a seven-point scale, where 1 indicates Very Dissatisfied and
7 indicates Very Satisfied. Limitations not affecting the statistical
validity of the sample include: sole proprietors and self-employed
individuals and farmers, as well as individual shareholders and
partners examined as a result of a corporate audit are included in the
sample. The sample does not include businesses that file corporate and
partnership returns, individuals who did not respond to correspondence
and audit appointment letters, individuals IRS cannot locate and
individuals with an international address.
22. Total Number of Service Center Exams Returns Examined ” Number of
cases closed by employees assigned to the service center examination
branch.
Performance Discussion: A decision by management to redirect resources
to work through the backlog of inventory in the Earned Income Tax
Credit (EITC) area was successful. The additional resources and the
less complex examination of an EITC return caused an increase in
productivity and subsequently, results over the planned target.
23. Service Center Examination Quality” Quality of actions taken while
working service center examination cases. Quality review of the
sampled cases is completed and a review record produced by the quality
reviewer at each designated site.
24. Field-Exam Customer Satisfaction ” Represents the level of
satisfaction customer's receive from interactions with IRS Field
Examination employees. Scores represent the average overall level of
customer satisfaction ("Keystone" Question) from the Customer
Satisfaction Transactional Surveys. Survey recipients are asked to
rate IRS performance on a seven-point scale, where 1 indicates Very
Dissatisfied and 7 indicates Very Satisfied. Limitations on survey
data not affecting the statistical validity include: the survey
population is based solely on the audit closures of individual
taxpayers. Audit closures involving estate, corporate, excise and gift
tax returns are not included in the survey population. The results do
not include contacts the Examination division had with individuals
that did not result in an audit closure.
25. Individual Return Examinations > $100K” Number of Individual (Form
1040) returns closed through a time period from the beginning of the
fiscal year with a total positive income or total gross receipts
greater than $100,000.
Performance Discussion: The original plan assumed increases in
resources; percentages of direct time applied, and reduction in the
time per return. These improvements were not realized resulting in
fewer returns closed. Immediate emphasis has been placed on building
and maintaining optimal inventory levels, case management and issuance
of revised program guidance.
26. Individual Return Examinations < $100K” Number of Individual (Form
1040) returns closed through a time period from the beginning of the
fiscal year with a total positive income or total gross receipts less
than $100,000.
27. Total Returns Examined ” Combined count of the Number of
Individual (Form 1040) returns closed through a time period from the
beginning of the fiscal year with a total positive income or total
gross receipts less than or greater than $100,000.
Performance Discussion: The original plan assumed increases in
resources; percentages of direct time applied, and reduction in the
time per return. These improvements were not realized resulting in
fewer returns closed. Immediate emphasis has been placed on building
and maintaining optimal inventory levels, case management and issuance
of revised program guidance.
28. Field-Exam Case Quality Score ” The score awarded to a reviewed
Field Examination case by a Quality Reviewer using the Examination
Quality Measurement System (EQMS) quality standards.
Performance Discussion: The apparent increase in case quality score in
FY 2001 is due to changes in the case quality point scale and number
of standards measured, as compared to FY 2000.
29. Number of Returns Examined General Industry ” Includes Industry
returns closed. Includes all classes of returns.
Performance Discussion: The FY 2001 planning assumptions were made
with limited historical information. Also, there was a larger than
expected expenditure of time in areas that do not ordinarily result in
a closed case. Accordingly, the number of returns that were planned
did not materialize.
30. Number of Cases Examined (Large Case) ” Number of regular
Coordinated Industry cases closed during the period ("R1" cases; i.e.,
not including claim cases, cases returned from Appeals, or non-
examined closures). A Coordinated Industry case consists of one or
more tax years of the primary taxpayer (usually a large corporate
return) plus all related returns examined in conjunction with the
primary taxpayer.
Performance Discussion: The increase in cases examined in FY 2001, as
compared to FY 2000, is attributed to a large number of staff re-
directed to case examination. In FY 2000, a large number of staff
within LMSB were engaged in design teams activities focused on
organization and stand up.
31. Number of Returns Closed (Large Case) ” Coordinated Industry
corporate returns (F1120) closed with designated activity codes. 32.
EP & EO Customer Satisfaction ” Customers' overall level of
satisfaction with the way their cases were handled by the IRS EP & EO
Determination programs. Scores represent the average overall level of
customer satisfaction ("Keystone" Question) from the Customer
Satisfaction Transactional Surveys. Survey recipients are asked to
rate IRS performance on a seven-point scale, where 1 indicates Very
Dissatisfied and 7 indicates Very Satisfied.
33. EP & EO Examinations Closed ” Number of EP & EO return
examinations closed in all categories.
Performance Discussion: A surge in determination receipts was expected
and inventories of open examination cases were kept low in order to
ensure a smooth transition of agents from working examinations to
determinations. When the anticipated volume of determination receipts
did not materialize, additional returns were placed in process. Many
of the additional returns were larger plans that require longer
processing time and resulted in fewer returns closed than expected.
34. EP & EO Examination Quality” Level of quality in the EP & EO
examination program, as measures by the Tax Exempt Quality Measurement
System (TEQMS).
Performance Discussion: The overall decline in quality was primarily
attributed to the Examination Planning and Workpaper standards which
were found to be inconsistent with current work processes and require
modification. These quality standards were addressed through targeted
training sessions in FY 2001 and emphasis on quality will continue
during regular training for all agents.
35. Appeals Cases Closed ” Total Cases Closed (Total Disposals) equals
the total number of cases closed in Appeals. This includes both non-
docketed and docketed cases. (A docketed case is one in which a
taxpayer has filed a petition in the Tax Court.) This measure is
currently reported in workunits. A workunit represents a single case
or group of related cases, which are being considered by Appeals as
one unit for settlement of decision purposes.
Performance Discussion: The Appeals workload continued to shift from
examination to predominantly collection-type work, including
Collection Due Process. Resources were diverted to accommodate the
dramatic increase in Collection work and a comprehensive training
program of retraining and mentoring existing personnel to handle this
new source of work was initiated. The impact of diverting resources
and retraining existing personnel to accommodate the shift in workload
contributed to an increase in cycle time and subsequently, lower than
planned productivity.
36. Taxpayer Advocate Service (TAS) Closed Cases ” Number of cases
worked in TAS and closed on the Taxpayer Advocate Management
Information System (TAMIS).
37. Casework Quality Index Tool to measure effectiveness in meeting
customer expectations based on a random sample of cases reviewed and
scored against customer service standards of timeliness, accuracy, and
communication.
38. Total Enforcement Revenue Collected (billions) ” Revenue received
as a result of activities performed by enforcement functions. This
revenue is collected through the efforts of Appeals, Chief Counsel,
Collection, Examination, and the Information Return Processing
(IRP)/Underreporter program are captured.
39. Agency-Wide Employee Satisfaction ” Measure of employee's
satisfaction with their job at the IRS. At the Service-wide level the
results of Survey Item CO 1 (Considering everything, how satisfied are
you with your job?) are used as the sole determining factor in the
reported results. Additionally, survey questions regarding the
employees perception of management practices, organizational barriers,
and overall work environment that impacts an employees' efforts to do
a good job are used in the results.
Performance Discussion: The measurement definition was changed from FY
2000 to FY 2001 so results are not fully comparable. Nevertheless, the
numbers show a decline in FY 2001, which can be attributed to the
effects of the reorganization, which are also showing up as negative
results in the Climate Survey. The IRS Commissioner has made improving
employee satisfaction results the responsibility of each individual
manager (an element in each manager's performance plan) and every
Operating and Functional Division (OD and FD's). Divisions are now
analyzing their census survey results in light of their Climate Survey
data to determine what (if any) additional Division-level responses
are needed.
40. FTE per Billion $ Real GDP ” Service-wide Employment as a
proportion of national expenditures.
8. Systems Controls and Legal Compliance:
Federal Manager's Financial Integrity Act (FMFIA):
In accordance with the FMFIA, the IRS evaluated its systems of
internal controls for FY 2001. The IRS is providing a "qualified
assurance" that Section 2 and Section 4 objectives are being achieved.
Overall, the IRS internal control systems are adequate in achieving
the objectives of the Integrity Act. This qualified assurance is based
on our identification of material weaknesses and national significant
control deficiencies. All weaknesses and deficiencies are being
addressed by corrective action plans.
During the year, the Financial and Management Controls Executive
Steering Committee (FMC ESC) reviewed audit findings and Service
operations. This summer, IRS managers conducted a thorough self-
assessment of the management controls for their operations and
reported issues for National Headquarters review. The Business Owners
reviewed the issues and recommended to the FMC ESC the actions taken
or planned for each issue. The FMC ESC also reviewed existing
weaknesses and national significant control deficiencies throughout
the year to ensure progress was being made. They also gave the final
determination about officially closing items. During the fiscal year,
the IRS closed three material weaknesses and opened two.
Federal Financial Management Improvement Act (FFMIA):
As of September 30, 2001, the Service's financial management systems
did not substantially comply with the FFMIA. Plans are in place to
resolve the material weaknesses causing this condition, and the
initiatives associated with these plans are in the IRS Modernization
Bluebook.
Performance Measures:
The Service provides assurance that the IRS Critical Performance
Measures are reliable.
Laws and Regulations:
As of September 30, 2001, the IRS did not always comply with Section
6325 of the Internal Revenue Code regarding the release of federal tax
liens although significant improvement over prior year was realized.
Continuity of Operations and Reports Consolidation Act of 2000:
The IRS is addressing continuity of operations planning in critical
areas. Subsequent to the events of September 11, 2001, actions were
taken to assess baseline business processes and to enhance
capabilities where needed. These actions included improving the
disaster recovery capabilities at the Computing Centers, which had
been reported as a significant control deficiency. Because the
September 11th terrorist attacks increased the risk associated with
this deficiency, the IRS is placing more emphasis on strengthening its
disaster recover capabilities. Accordingly, Computing Center Security
is being designated as a material weakness.
9. Trends, Issues, Problems:
Success in achieving IRS' mission, goals, and objectives is influenced
by the environment in which we operate and determines the strategies
we use to achieve our goals. Each of the IRS' major organizational
units conducted an assessment of their internal and external
environment to identify trends, issues, and problems (TIPS) that were
affecting business operations. They identified dozens of TIPS and
developed strategies to address them. The most significant TIPS have
been organized around twelve themes: Service to Taxpayers;
Communication with Taxpayers; Pre-filing Agreements; Electronic Tax
Administration; Complexity of the Tax Law; Global Trading; Compliance
Services; Areas of Low Compliance; Measuring Compliance; Human
Resources Issues; Technology in Support of Business Operations; and
Shared Services in Support of Business Operations.
For the IRS to better understand the problems experienced by its
customers, the Taxpayer Advocate Service (TAS) reported on its "23
most serious problems list," as presented in the FY 2001 Annual Report
to Congress. This listing was compiled through TAS casework data as
well as input from the Citizen Advocacy Panels, the opinions of the
external stakeholder groups, and finally the internal stakeholders.
Tax code complexity remains a significant problem for both business
and individual taxpayers and is the root-cause of many other problems
on the 'Top 23" list. Leading the list in this report are:
1. Access to Customer Service Toll-Free Telephone Service; 2. Multiple
Definitions of "Qualifying Child"; 3. Determining Earned Income Tax
Credits (EITC); 4. Answers to Questions on Customer Service Toll-Free
lines; 5. Documenting Earned Income Tax Credit (EITC eligibility; 6.
Refund Inquiries;
7. Earned Income Tax Credit (EITC) Examinations; 8. Understanding
Estimated Tax Payments; 9. Explanations on Math Error Notices; and;
10. Processing Claims for Refund.
A uniform process has been established to address each problem as
follows: each reported problem is assigned a responsible IRS official,
problem definitions, analysis of problem, IRS comments, IRS
initiatives to resolve problem, information technology impact and TAS
comments. This information feeds into a system of periodic reviews.
The National Taxpayer Advocate has also made legislative
recommendations in the following areas which are intended to simplify
tax reporting, thereby reducing burden to taxpayers and the IRS:
family status issues, joint and several liability, alternative minimum
tax for individuals, penalties and interest, home-based workers, IRS
collection procedures, and additional recommendations.
10. Limitations of the Financial Statements:
The principal financial statements have been prepared to report the
financial position and results of operations of the entity, pursuant
to the requirements of 31 U.S.C. 3515(b). While the statements have
been prepared from the books and records of the entity in accordance
with generally accepted accounting principles (GAAP) 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 they
are for a component of the U.S. Government, a sovereign entity.
[End of Management Discussion and Analysis]
Department of the Treasury:
Internal Revenue Service:
Financial Statements:
Fiscal Year 2001:
Balance Sheets:
Department of the Treasury:
Internal Revenue Service:
Balance Sheets:
As of September 30, 2001 and 2000 (In Millions):
Assets:
Intragovernmental:
Fund balance with Treasury and cash (Note 2): 2001: $2,070;
2000: $2,008.
Due from Treasury (Note 12):
2001: $1,419;
2000: $1,040.
Accounts receivable, Net (Note 3): 2001: $33;
2000: $11.
Advances to government agencies: 2001: $128;
2000: $163.
Total Intragovernmental:
2001: $3,650;
2000: $3,222.
With the Public:
Federal Taxes receivable, net of Allowance for doubtful accounts
(Notes 5, 12):
2001: $20,000;
2000: $22,000.
Accounts receivable, Net (Note 3):
2001: $3;
2000: $4.
Advances to the public:
2001: $15;
2000: $14.
Other assets (Note 4, 12):
2001: $195;
2000: $93.
Total with the Public:
2001: $20,213;
2000: $22,111.
Property and equipment, Net (Note 6):
2001: $1,381;
2000: $1,266.
Total Assets:
2001: $25,244;
2000: $26,599.
Liabilities:
Intragovernmental:
Due to Treasury (Notes 5, 12):
2001: $20,000;
2000: $22,000.
Accrued expenses (Note 7):;
2001: $89;
2000: $71.
Other liabilities (Note 8):
2001: $81;
2000: $87.
Total Intragovernmental:
2001: $20,170;
2000: $22,158.
Federal tax refunds payable (Note 12):
2001: $1,419;
2000: $1,040.
Accounts payable (Note 7):
2001: $27;
2000: $43.
Accrued expenses (Note 7):
2001: $608;
2000: $513.
Other liabilities (Note 8):
2001: $1,071;
2000: $909.
Capital lease liability (Note 9):
2001: $125;
2000: $21.
Contingencies (Note 10):
2001: $6;
2000: $12.
Total Liabilities:
2001: $23,426;
2000: $24,696.
Net Position:
Unexpended Appropriations:
2001: $1,380;
2000: $1,385.
Cumulative Results of Operations:
2001: $438;
2000: $518.
Total Net Position:
2001: $1,818;
2000: $1,903.
Total Liabilities and Net Position:
2001: $25,244;
2000: $26,599.
The accompanying notes are an integral part of these statements.
[End of Balance Sheets]
Statement of Net Cost:
Department of the Treasury:
Internal Revenue Service:
Statement of Net Cost:
For the Fiscal Year Ended September 30, 2001 (In Millions):
Program: Pre-Filing Taxpayer Assistance and Education;
Full Cost: $579;
Exchange Revenue: ($48);
Net Cost of Operations: $531.
Program: Filing and Account Services;
Full Cost: $3,099;
Exchange Revenue: ($18);
Net Cost of Operations: $3,081.
Program: Compliance Services;
Full Cost: $5,601;
Exchange Revenue: ($170);
Net Cost of Operations: $5,431.
Program: Administration of Earned Income Tax Credit;
Full Cost: $255;
Exchange Revenue: [Empty];
Net Cost of Operations: $255.
Net Cost of Operations (Note 17):
Full Cost: $9,534;
Exchange Revenue: ($236);
Net Cost of Operations: $9,298.
The accompanying notes are an integral part of these statements.
[End of Statement of Net Cost]
Statements of Changes in Net Position:
Department of the Treasury:
Internal Revenue Service:
Statements of Changes in Net Position: For the Fiscal Years Ended
September 30, 2001 and 2000 (In Millions):
Net Cost of Operations:
2001: $9,298;
2000: $8,723.
Financing Sources (other than exchange revenue):
Appropriations used:
2001: $8,844;
2000: $8,344.
Transfers (to)/from General Fund and other:
2001: ($32);
2000: ($48).
Imputed financing:
2001: $406;
2000: $396.
Total Financing Sources:
2001: $9,218;
2000: $8,692.
Net Results of Operations:
2001: ($80);
2000: ($31).
Net Change in Cumulative Results of Operations:
2001: ($80);
2000: ($31).
Increase/(Decrease) in Unexpended Appropriations:
2001: ($5);
2000: ($179).
Change in Net Position:
2001: ($85);
2000: ($210).
Net Position ” Beginning of Period:
2001: $1,903;
2000: $2,113.
Net Position ” End of Period:
2001: $1,818;
2000: $1,903.
The accompanying notes are an integral part of these statements
[End of Statements of Changes in Net Position]
Statements of Budgetary Resources:
Department of the Treasury:
Internal Revenue Service:
Statements of Budgetary Resources: For the Fiscal Years Ended
September 30, 2001 and 2000 (In Millions):
Budgetary Resources:
Budget authority:
2001: $9,114;
2000: $8,319.
Unobligated balances ” beginning of period:
2001: $791;
2000: $933.
Spending authority from offsetting collections:
2001: $121;
2000: $107.
Adjustments (Note 18):
2001: ($78);
2000: ($12).
Total Budgetary Resources:
2001: $9,948;
2000: $9,347.
Status of Budgetary Resources:
Obligations incurred (Note 11):
2001: $9,507;
2000: $8,556.
Unobligated balances ” available (Note 2):
2001: $196;
2000: $346.
Unobligated balances ” unavailable (Note 2):
2001: $245;
2000: $445.
Total Status of Budgetary Resources:
2001: $9,948;
2000: $9,347.
Outlays:
Obligations incurred (Note 11):
2001: $9,507;
2000: $8,556.
Less: Spending authority from offsetting collections and adjustments:
2001: ($231);
2000: ($180).
Obligated balance, net ” beginning of period:
2001: $1,232;
2000: $1,240.
Less: Obligated balance, net ” end of period:
2001: ($1,635);
2000: ($1,232).
Total Outlays:
2001: $8,873;
2000: $8,384.
The accompanying notes are an integral part of these statements
[End of Statements of Budgetary Resources]
Statements of Financing:
Department of the Treasury:
Internal Revenue Service:
Statements of Financing:
For the Fiscal Years Ended September 30, 2001 and 2000 (In Millions):
Obligations and Nonbudgetary Resources:
Obligations incurred:
2001: $9,507;
2000: $8,556.
Less: Spending authority from offsetting collections and adjustments:
2001: ($231);
2000: ($180).
Financing source ” imputed financing:
2001: $406;
2000: $396.
Exchange revenue not in the budget:
2001: ($121);
2000: ($115).
Transfer of fixed assets:
2001: [Empty];
2000: ($8).
Total Obligations, as Adjusted, and Nonbudgetary Resources:
2001: $9,561;
2000: $8,649.
Resources That Do Not Fund the Net Cost of Operations:
Change in amount of goods, services, and benefits ordered but not yet
received or provided:
2001: ($324);
2000: $24.
Change in unfilled customer orders:
2001: [Empty];
2000: ($1).
Costs capitalized on the Balance Sheet:
2001: ($410);
2000: ($380).
Financing sources that fund costs of prior periods:
2001: [Empty];
2000: $8.
Total Resources That Do Not Fund the Net Cost of Operations:
2001: ($734);
2000: ($349).
Costs That Do Not Require Resources:
Depreciation and amortization:
2001: $331;
2000: $362.
Expenditure offset for pending refund:
2001: [Empty];
2000: $5.
Total Costs That Do Not Require Resources:
2001: $331;
2000: $367.
Financing Sources Yet to be Provided:
2001: $140;
2000: $56.
Net Cost of Operations:
2001: $9,298;
2000: $8,723.
The accompanying notes are an integral part of these statements.
[End of Statements of Financing]
Statements of Custodial Activity:
Department of the Treasury:
Internal Revenue Service:
Statements of Custodial Activity: For the Fiscal Years Ended September
30, 2001 and 2000 (In Billions):
Revenue Activity:
Collections of Federal Tax Revenue (Note 15):
Individual income, FICA/SECA, and other:
2001: $1,844;
2000: $1,765.
Corporate income:
2001: $187;
2000: $235.
Excise:
2001: $52;
2000: $55.
Estate and gift:
2001: $29;
2000: $29.
Railroad retirement:
2001: $5;
2000: $5.
Federal unemployment:
2001: $7;
2000: $7.
Total Collections of Federal Tax Revenue:
2001: $2,124;
2000: $2,096.
Increase/(Decrease) in federal taxes receivable, net:
2001: ($2);
2000: $1.
Total Federal Tax Revenue:
2001: $2,122;
2000: $2,097.
Distribution of federal tax revenue to Treasury:
2001: $2,124;
2000: $2,096.
Increase/(Decrease) in amount due to Treasury:
2001: ($2);
2000: $1.
Total Disposition of Federal Tax Revenue:
2001: $2,122;
2000: $2,097.
Net Federal Revenue Activity:
2001: [Empty];
2000: [Empty].
Federal Tax Refund Activity (Note 16):
Total Refunds of Federal Taxes:
2001: $251;
2000: $194.
Appropriations Used for Refund of Federal Taxes:
2001: ($251);
2000: ($194).
Net Federal Tax Refund Activity:
2001: [Empty];
2000: [Empty].
The accompanying notes are an integral part of these statements
[End of Statements of Custodial Activity]
Notes to the Financial Statements:
Internal Revenue Service:
Notes to the Financial Statements: For the Fiscal Years Ended
September 30, 2001 and 2000:
Note 1. Summary of Significant Accounting Policies:
A. Reporting Entity:
The Internal Revenue Service (the Service) is a bureau of the U.S.
Department of the Treasury (Treasury). The Service originated in 1862,
when Congress established the Office of the Commissioner of the
Internal Revenue. In 1952, the Bureau was reorganized by Congress and
in 1953 became the Internal Revenue Service (IRS).
In FY 2001, the Service completed the implementation of a plan to
reorganize its structure and management in accordance with the IRS
Restructuring and Reform Act enacted by Congress in 1998. The Service
implemented a modernized structure built around taxpayer needs. The
revamped organization consists of:
* Four operating divisions – Wage and Investment addresses the needs
of taxpayers with wage and investment income only. Small Business and
Self-Employed serves self-employed individuals and small businesses.
Tax-Exempt and Government Entities supports employee plans, tax exempt
organizations, and government entities. Large and Mid-Size Business
serves corporations, sub-chapter S corporations, and partnerships with
assets greater than $5 million. Each of these divisions performs the
functions of processing and examination of tax returns for its
constituent taxpayers. Wage and Investment performs collection
activities related to its own customers Small Business and Self-
Employed performs collection activities on its customer accounts as
well as those of Tax Exempt and Government Entities and Large and Mid-
Size Business.
* Two service organizations – Modernization and Information Technology
Services and Agency Wide Shared Services provide central support to
all areas of the Service;
* Separate specialized independent channels for taxpayers – Appeals
and Taxpayer Advocate Service divisions are independent of the
operating divisions and other units of the Service. The Taxpayer
Advocate Service reports directly to Congress;
* A line unit, Criminal Investigation, has sole responsibility for
investigation of criminal violations of the tax law and is independent
of the operating divisions;
* Chief Counsel provides tax advice, guidance, and legislative
services to all components of the Service; and;
* A smaller National Headquarters office fills the role of setting
broad policy, providing executive oversight, reviewing plans and goals
of the operating units, and developing major improvement initiatives.
The mission of the Service is to provide America's taxpayers top-
quality service by helping them understand and meet their tax
responsibilities and by applying the tax law with integrity and
fairness to all.
B. Basis of Presentation:
The accompanying financial statements report the Service's financial
position as of September 30, 2001 and 2000, and its changes in net
position, budgetary resources, financing, and custodial activity for
the years then ended. The net cost of operations is reported for the
fiscal year (FY) ended September 30, 2001. The Office of Management
and Budget (OMB) issued a waiver exempting the Service from including
the net cost of operations for the fiscal year ended September 30,
2000 in the accompanying financial statements. The waiver was granted
due to a change in basis of presentation between FY 2001 and FY 2000
for the statement of net cost. In FY 2000 program costs were presented
for individual major functional areas of the Service. In FY 2001
program costs are aggregated into broader categories associated with
pre-filing assistance, filing and account maintenance, and compliance
activities. The single exception to this is EITC, which spans all
activities”pre-filing, filing and compliance”associated with
administration of the EITC program.
These statements include the accounts of all funds under the Service's
control, which have been established to account for the resources of
the Service, as well as funds for the purpose of recording tax
revenues and refunds. They were prepared from the Service's accounting
and financial management systems in accordance with OMB Bulletin No.
97-01, Form and Content of Agency Financial Statements, as amended,
portions of OMB Bulletin No. 01-09, Form and Content of Agency
Financial Statements effective in FY 2001, and the Service's
accounting policies which are summarized in this note.
C. Basis of Accounting:
The accompanying financial statements are presented on a basis in
accordance with generally accepted accounting principles (GAAP).
Balance Sheets, Statements of Chances in Net Position:
These statements are presented on the accrual basis of accounting.
Under the accrual method, revenues are recognized when earned, and
expenses are recognized when costs are incurred or goods or services
are received, without regard to receipt or payment of cash.
Statement of Net Cost:
The statement of net cost presents the full costs incurred by the
Service in performing its mission, net of related exchange revenues.
Full costs include direct costs, indirect costs assigned in a manner
that reflects direct consumption of resources, and a proportionate
share of other indirect costs. Where practicable, indirect costs are
assigned directly. Where not practicable, they are allocated on a
reasonable and consistent basis. General and administrative expenses
(G & A) are included in indirect costs. G & A includes costs for
headquarters administration, human resources, equal employment
opportunity, education, procurement, general legal services and other
miscellaneous administrative services.
In FY 2001 program costs are aggregated across divisional lines into
broad-based cost centers - pre-filing, filing, compliance and Earned
Income Tax Credit--described below. In general, these cost centers
encompass all costs within the span of their activities. However, in
the case of Earned Income Tax Credit, costs are segregated from other
pre-filing, filing, and compliance activities, and reported in a
separate program.
Exchange revenues include user fees from the public and reimbursable
revenue from other government agencies. They are reflected as
offsetting revenues against related program costs.
The majority of user charges are fees for installment agreements and
determinations of tax-exempt status. Installment agreement fees are
set at an amount below full cost. Fees for certain determinations are
also set below full cost. Additionally, reimbursable fees are set
below full cost; these fees are based on incremental costs incurred to
provide services to other federal agencies.
Pre-Filing Taxpayer Assistance and Education:
Provides services to taxpayers before returns are filed, to assist
taxpayers in preparing correct returns. Primary activities include
interpretations, preparing and disseminating tax publications and
information, taxpayer education programs, researching customer needs,
pre-filing agreements and determinations, and initiatives to promote
electronic tax filing. Exchange revenues include user fees from the
pre-filing agreements and determinations, letter rulings, and enrolled
agent fees.
Filing and Account Services:
Performs accounts maintenance functions of processing tax returns,
recording tax payments, issuing refunds, and maintaining taxpayer
accounts. The scope extends to all tax returns and taxpayer accounts
regardless of type and method of filing. Program activities also
include providing field assistance in preparing tax returns and
supplying tax forms to the public.
Compliance Services:
Administers compliance activities after a return is filed in order to
identify and correct possible errors or underpayments. This program
includes field collection activities, document matching, examination
of returns, criminal investigation, and tax litigation. Exchange
revenues include installment agreement fees.
Administration of Earned Income Tax Credit (EITC):
Administers the EITC program. It includes expanded customer service,
public outreach, enforcement, and research efforts to reduce claims
and erroneous filings associated with EITC. It comprises pre-filing,
filing and account services, and compliance activities. EITC payments
actually refunded to individuals or credited against other tax
liabilities are not included in program costs.
Statements of Budgetary Resources:
The statements of budgetary resources are presented using the
budgetary basis of accounting. Budgetary accounting facilitates
compliance with legal constraints and controls over the use of federal
funds. These financial statements are in addition to the reports
prepared by the Service throughout the years pursuant to OMB
directives for purposes of monitoring and controlling the Service's
obligation and expenditure of budgetary resources.
Statements of Financing:
The statements of financing are presented using both an accrual and a
budgetary basis of accounting as a means to facilitate understanding
of the differences between the two accounting bases.
Statements of Custodial Activity:
The statements of custodial activity are presented on the modified
cash basis of accounting. This method initially reports revenue in the
financial statements on the cash basis, which is then adjusted by the
change in net federal taxes receivable --net of the change in refunds
payable-- during the current fiscal year. This adjustment effectively
converts the cash basis revenue and refunds to a full accrual amount.
The related distribution of all such collections to the Treasury is
similarly reported on the cash basis. It is then adjusted to the
accrual basis by the net change during the fiscal year in uncollected
amounts due to Treasury.
Refunds of taxes and interest are reported on the cash basis. Refunds
include payments of earned income tax credits (EITC) and child care
credits, as well as overpayments of taxes.
D. Financing Sources and Exchange Revenue:
The Service receives the majority of its funding through annual, multi-
year, and no-year appropriations that are available for use within
statutory limits for operating and capital expenditures.
Appropriations are recognized as financing sources when the related
expenses are incurred. The following are the different types of
operating appropriations:
Processing, Assistance, and Management:
This appropriation provides funds for processing tax returns and
related documents; assisting taxpayers in the filing of their returns
and in paying taxes that are due; matching information returns with
tax returns; conducting internal audit reviews and internal security
investigations; and managing financial resources, rent, and utilities.
Tax Law Enforcement:
The purpose of this appropriation is to provide funds for the
examination of tax returns, and the administrative and judicial
settlement of taxpayer appeals of examination findings. It also
provides for issuing technical rulings, monitoring employee pension
plans, determining qualifications of organizations seeking tax-exempt
status, examining tax returns of exempt organizations, enforcing
statutes relating to detection and investigation of criminal
violations of the internal revenue laws, collecting unpaid accounts,
compiling statistics of income and compliance research, and securing
unfiled tax returns and payments.
Information Systems:
This appropriation funds costs for data processing and information and
telecommunication support for the Service's activities, including
developmental information systems and operational information systems.
The operational systems are located in a variety of sites including
the Martinsburg Computing Center, the Detroit Computing Center, the
Tennessee Computing Center, and in district offices and service
centers.
Other:
These budgetary accounts consist of an aggregate of smaller multi-
functional funds that support the Service's mission to collect the
proper amount of tax and provide improved customer service to the
taxpayer. The Information Technology Investments appropriation is the
largest of these funds and may be obligated as Congress approves
expenditure plans. Also included is the Earned Income Tax Credit
appropriation that funds the administration of the EITC program.
In addition, the Service incurs certain costs that are paid in total
or in part by other federal entities, such as pension costs
administered by the Office of Personnel Management and legal judgments
paid by the Treasury Judgment Fund. These constitute subsidized costs
and are recognized by the Service on its statements of changes in net
position and statements of financing as imputed financing sources
equal to the cost paid by other federal entities.
E. Fund Balance with Treasury and Cash:
The fund balance with Treasury is the aggregate amount of funds in the
Service's accounts including appropriated funds from which the Service
is authorized to make expenditures and pay liabilities; as well as
funds in deposit, suspense, and clearing accounts. Generally, cash
receipts and disbursements are processed by the Treasury. Imprest
funds are maintained by Headquarters and field offices in commercial
bank accounts.
F. Accounts Receivable, Net:
Accounts receivable consists of amounts due from federal agencies,
state and local governments, and the public. The balance of accounts
receivable for reimbursable services includes both billed and unbilled
receivables. Unbilled accounts receivable are recorded, and
reimbursable revenues are recognized, as the services are performed
and costs are incurred. The unbilled receivables are later transferred
to billed accounts receivable when bills are rendered to the buying
agencies. The allowance for uncollectible accounts is based on an
annual review of groups of accounts by age and includes accounts
receivable balances older than one year.
G. Advances:
Advances to government agencies primarily represent funds paid to the
Treasury Working Capital Fund (WCF). Amounts in the fund are available
for expenses of operating and maintaining common administrative
services of Treasury that can be performed more economically as a
centralized service. Centralized services funded through the WCF for
the Service consist primarily of telecommunications services, payroll
processing, and depreciation of property and equipment owned by the
WCF. Each quarter the WCF allocates charges for these services to the
Service based on its pro rata share of usage. In accordance with
established WCF procedures, Treasury collects funds for these services
in advance from Treasury bureaus. The Service records the initial
payments as advances and subsequently recognizes expenses as quarterly
statements are received.
In FY 1999 the Service recorded a one-time accounting adjustment to
capitalize telecommunications equipment owned by the WCF. These costs
are included in advances to government agencies as of September 30,
2001 and September 30, 2000, and are amortized over the seven-year
life of the equipment. After FY 1999, further capitalization of WCF
equipment was discontinued. Subsequently, all WCF costs--including
depreciation of equipment”are reported as current year expenses.
The majority of advances to the public are for investigations and
employee travel advances, which are expensed upon receipt of
employees' expense reports.
H. Property and Equipment:
The net book values of Property and Equipment as of September 30, 2001
and 2000, consist of the following components:
General Property and Equipment acquired before October 1, 1999:
The estimated net book value of ADP equipment, telecommunication
equipment, office equipment and furniture, investigative equipment,
and vehicles as of September 30, 1999, was derived based upon
estimates of the net book value of a statistically selected sample of
assets, using techniques prescribed by the Uniform Standards of
Appraisal Practice. These estimated net book values were then
projected to the entire population of assets. With the exception of
small expendable computer peripherals such as keyboards and cables,
all property and equipment in the categories described above and
acquired before October 1, 1999 is capitalized regardless of the
dollar amount of individual assets. Depreciation on these assets is
calculated using the straight line method and is based on the
estimated net book values and projected remaining useful lives of the
assets as of September 30, 1999.
ADP and Telecommunication Equipment acquired after September 30, 1999:
The method used by the Service to report the capitalized ADP and
telecommunication assets acquired after September 30, 1999 is
described as "pooling." Under pooling, all ADP and telecommunication
equipment is recorded at cost. Each fiscal year separate pools are
established for each class of ADP and telecommunication assets, as
distinguished by the useful lives of the assets. In FY 2001 and FY
2000, there are two pools--one for equipment with a useful life of
three years, consisting of microcomputers, related equipment, and
software; the other for assets with a useful life of seven years,
consisting of supercomputers, mainframes, minicomputers,
telecommunications equipment, and all related equipment and software.
Beginning in fiscal year 2001, software is excluded from ADP and
telecommunications equipment if it is associated with one of the major
internal use software projects described below under Internal Use
Software Small computer peripherals are excluded from the pools. With
these exceptions, all other costs of ADP and telecommunication
equipment acquired after September 30, 1999 are accumulated regardless
of the dollar value of individual assets.
Depreciation on these assets is calculated using the straight-line
method over the estimated useful lives with a half-year of
depreciation taken in the year of acquisition. Under the pooling
concept, only disposals that are material to the financial statements
are recognized. The Service performed an analysis of the FY 2001 and
2000 pools and determined that disposals were not material to the
financial statements.
Office Equipment and Furniture, Investigative Equipment, and Vehicles
acquired after September 30, 1999:
The Service capitalizes office equipment and furniture, investigative
equipment, and Criminal Investigation Division vehicles acquired after
September 30, 1999, with an individual-asset acquisition cost of
$5,000 or more. Depreciation on these assets is calculated using the
straight-line method over the estimated useful lives with a half-year
of depreciation taken in the year of acquisition. Useful lives are
established as ten years for office equipment and investigative
equipment, eight years for furniture, and five years for vehicles.
Under the pooling concept, only disposals that are material to the
financial statements are recognized. The Service performed an analysis
of the FY 2001 and 2000 pools and determined that disposals were not
material to the financial statements.
Major Systems:
The Service has ten systems it considers major systems as of September
30, 2001 and September 30, 2000. Major systems are defined as any
system where the estimated development costs are expected to exceed
$20 million. Costs included in the major systems category include
direct operating costs for the design, development, acquisition, and
implementation of the major systems software. Other costs associated
with these major systems, such as hardware, transportation and
installation of hardware are included in the property and equipment
categories previously described. Costs associated with preparation of
facilities to house the systems are classified as leasehold
improvements.
Prior to FY 2001 the Service capitalized certain costs of large-scale
computer systems as major systems. Due to implementation of Statement
of Federal Financial Accounting Standards No. 10, Accounting for
Internal Use Software, the Service discontinued accumulation of costs
in the major systems category after September 30, 2000. Subsequently,
such costs are included in internal use software. Costs capitalized
prior to September 30, 2000 continue to be depreciated over the
remaining useful lives of the major systems.
Separate categories are established for major systems and major
systems in process. Major systems are considered placed in service
when development is complete; the system is in all-important respects
ready for use, deployment of the system is underway, and significant
system changes are not anticipated. Until placed in service, major
systems are shown as work in process (WIP). Major systems are
depreciated using the straight-line method over an estimated useful
life of seven years with a half-year of depreciation taken in the year
the major system is placed in service. Major systems are disposed”or
net book value is reduced”to the extent they are considered impaired.
During the years ended September 30, 2001 and September 30, 2000 there
were no disposals of assets included in major systems.
Internal Use Software:
In accordance with Statement of Federal Financial Accounting Standards
No. 10, Accounting for Internal Use Software, beginning in FY 2001,
the Service capitalizes all internal use software with an acquisition
or estimated development cost of $7 million or more. Capitalized costs
for internally or contractor-developed internal use software include
the full costs, both direct and indirect, incurred during the software
development stage. As such, capitalizable costs are limited to costs
incurred after:
* Management authorizes and commits to a computer software project,
believes that it is more likely than not that the project will be
completed, and expects the software will be used to perform the
intended function with an estimated service life of two years or more
and;
* Completion of the preliminary design stage”i.e., conceptual
formulation, design, and testing of possible software project
alternatives.
Internal-use software is considered work in process until final
acceptance and testing have been successfully completed. Once
completed, the costs are amortized using the straight-line method over
the estimated useful life of seven years with a half-year of
amortization taken in the year placed in service. Internal use
software projects are disposed”or net book value is reduced”to the
extent they are considered impaired. During the year ended September
30, 2001 there were no disposals of amounts included in internal use
software.
Leasehold Improvements:
This category of assets is shown at historical cost less depreciation.
Depreciation on these assets is calculated using the straight-line
method with ten years as the estimated useful life of the improvements
with a half-year of depreciation taken in the year of acquisition. For
projects initiated before October 1, 1999, a $50,000 threshold was
used to identify projects capitalized as leasehold improvements; all
leasehold improvement projects initiated after September 30, 1999 are
capitalized regardless of cost.
I. Capital Lease Liability:
Certain computer equipment, mail sorters, copiers and other equipment
are leased under Lease-To-Ownership-Plans (LTOP). The original terms
of these LTOPs provide for 36 monthly payments for computers, and from
36 to 60 months for other equipment. Under each LTOP, the equipment is
owned as of the last monthly payment. These LTOP leases are classified
as capital leases. The liability reported represents the lesser of the
net present value of future lease payments required by the terms of
the capital leases or fair market value. Beginning in fiscal 2001, the
capital lease liability for computers and other equipment is included
in funded liabilities. Prior to fiscal 2001, the liability is included
in Liabilities Not Covered by Budgetary Resources.
In fiscal year 2001, the Service exercised its option to purchase
computer equipment related to the Mainframe Consolidation Project and
retired all remaining capital lease liabilities on this equipment.
Beginning in fiscal year 2001, due to the implementation of Statement
of Federal Financial Accounting Standards No. 10, Accounting for
Internal Use Software, capital lease liability also includes amounts
for computer software leased under software licensing agreements.
These licensing agreements provide for payments over periods ranging
from three to six years. The liability reported represents the net
present value of future lease payments. The capital lease liability
for software licenses is included in Liabilities Not Covered by
Budgetary Resources.
J. Permanent and Indefinite Funds:
The Service uses a special class of funds, designated as "permanent
and indefinite," to disburse tax refund principal and related
interest. These permanent and indefinite funds are not subject to
budgetary ceilings set by Congress during the annual appropriation
process. Because Congress permanently funds tax refunds from a
budgetary standpoint, tax refunds payable at year-end are fully
funded. The asset "Due from Treasury" designates this approved funding
to pay year-end tax refund liabilities, which are reflected in the
funds used for refund of federal taxes on the statement of custodial
activity along with tax refund payments for the year.
Although funded through the appropriation process, refund activity is
reported as a custodial activity of the Service. This presentation is
appropriate because refunds are, in substance, a custodial revenue-
related activity in that they are a direct result of taxpayer
overpayments of their tax liabilities. Federal tax revenue received
from taxpayers is not available for use in the operation of the
Service and is not reported on the statements of net cost. Likewise,
the resultant refunds of overpayments are not available for use by the
Service in operations. Consequently, to present refunds as an expense
of the Service on the statements of net cost with related
appropriations used would be inconsistent with the reporting of the
related federal tax revenue and would materially distort the costs
incurred by the Service in meeting its strategic objectives.
K. Tax Assessments and Abatements:
Under the Internal Revenue Code Section 6201, the Commissioner of the
IRS, as delegated by the Secretary of the Treasury, is authorized and
required to make inquiries, determinations, and assessments of all
taxes that have been imposed and accruing under any internal revenue
law but have not been duly paid (including interest, additions to the
tax, and assessable penalties). Unpaid assessments result from
taxpayers filing returns without sufficient payments; as well as from
the Service's enforcement programs, such as examination, under-
reporter, substitute for return, and combined annual wage reporting.
The Commissioner of the IRS also 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 that claimed a net operating loss that created a credit
that can be carried back to reduce a prior year's tax liability,
amended tax returns, correction of 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).
Abatements may result in claims for refunds or a reduction of the
unpaid assessed amount.
L. Federal Taxes Receivable:
Federal taxes receivable and the corresponding liability, "Due to
Treasury," are not accrued until related tax returns are filed, or
assessments made, and prepayments 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 for which the Service can
support the existence of a receivable through taxpayer agreement, such
as filing of a tax return without sufficient payment, or a court
ruling in favor of the Service. Taxes receivable are shown on the
balance sheet net of an allowance for doubtful accounts. The allowance
for doubtful accounts reflects an estimate of the portion of total
taxes receivable deemed to be uncollectible.
Compliance assessments are unpaid assessments, for which neither the
taxpayer nor a court has affirmed that the taxpayer owes amounts to
the Federal Government. Examples include assessments resulting from an
IRS audit or examination in which the taxpayer does not agree with the
results. These amounts are not reported on the balance sheet; however,
statutory provisions require that these accounts be maintained until
the statute for collection expires.
Write-offs consist of unpaid assessments for which the Service does
not expect further collections due to factors such as taxpayers'
bankruptcy, insolvency, or death. These amounts are also not reported
on the balance sheet; however, statutory provisions require that these
accounts be maintained until the statute for collection expires.
M. Significant Change in Accounting Principles:
Internal Use Software - In accordance with the requirements of
Statement of Federal Financial Accounting Standards No. 10, Accounting
for Internal Use Software, costs incurred after September 30, 2000,
for the acquisition or development of internal-use software are
capitalized. In accordance with the Standard, the new accounting
principle is adopted prospectively. Amounts capitalized or expensed in
fiscal years prior to FY 2001 have not been restated.
Note 2. Fund Balance with Treasury and Cash (In Millions):
Fund balance with Treasury and cash as of September 30, 2001 and 2000,
consist of the following:
Fund Balances and Cash:
Appropriated and other funds:
2001: $2,067;
2000: $2,005.
Imprest funds:
2001: $3;
2000: $3.
Fund Balance with Treasury and Cash:
2001: $2,070;
2000: $2,008.
Status of Fund Balance with Treasury:
Unobligated balances - Available:
2001: $196;
2000: $346.
Unobligated balances - Unavailable:
2001: $245;
2000: $445.
Obligated balances not yet disbursed:
2001: $1,635;
2000: $1,232.
Other funds:
2001: ($9);
2000: ($18).
Fund Balance with Treasury:
2001: $2,067;
2000: $2,005.
Available unobligated balances represent no-year and multi-year
appropriations that can be obligated after September 30, 2001 and
September 30, 2000. Unavailable unobligated balances are expired
appropriations no longer available to incur new obligations. Obligated
balances not yet disbursed include undelivered orders of $938 million
and $614 million as of September 30, 2001 and 2000, respectively.
Other funds primarily consist of suspense, deposit, and clearing funds.
In FY 2001 and FY 2000, the $1,379 and $1,405 totals of unobligated
balances and undelivered orders are different than the $1,380 and
$1,385 balances of unexpended appropriations, respectively. These
differences result from user fees and receivables with the public.
User fees that have not yet been transferred to appropriations are
included in fund balance but do not represent unexpended
appropriations. Receivables from the public are included in unexpended
appropriations but not in fund balance.
The Information Technology Investments (ITI) fund represents $270
million and $430 million of the appropriated fund balance as of
September 30, 2001 and 2000, respectively, which can only be obligated
pursuant to an expenditure plan approved by Congress. As of September
30, 2001, Congress has approved a cumulative amount of $577 million in
ITI appropriations received, of which $499 million has been obligated.
Unobligated balances include $78 million and $305 million of the ITI
fund as of September 30, 2001 and 2000, respectively. As of September
30, 2001, the entire $78 million was available for expenditure. As of
September 30, 2000, $211 million was available for expenditure, and
$94 million was unavailable.
Note 3. Accounts Receivable, Net (In Millions):
Accounts receivable and allowances for uncollectible accounts as of
September 30, 2001 and 2000, consist of the following:
Accounts receivable:
2001: Intra-Governmental: $35;
2001: With the Public: $5;
2000: Intra-Governmental: $19;
2000: With the Public: $6.
Allowance for uncollectible accounts:
2001: Intra-Governmental: ($2);
2001: With the Public: ($2);
2000: Intra-Governmental: ($8);
2000: With the Public: ($2).
Accounts Receivable, Net:
2001: Intra-Governmental: $33;
2001: With the Public: $3;
2000: Intra-Governmental: $11;
2000: With the Public: $4.
Note 4. Other Assets (In Millions):
Other assets, as of September 30, 2001 and 2000, consist of the
following:
Other custodial assets:
2001: Intra-Governmental: 0;
2001: With the Public: $191;
2000: Intra-Governmental: 0;
2000: With the Public: $87.
Federal tax lien revolving fund:
2001: Intra-Governmental: 0;
2001: With the Public: $4;
2000: Intra-Governmental: 0;
2000: With the Public: $6.
Total, Other Assets:
2001: Intra-Governmental: 0;
2001: With the Public: $195;
2000: Intra-Governmental: 0;
2000: With the Public: $93.
Other custodial assets primarily represent voluntary deposits received
from taxpayers, pending application of the funds to unpaid tax
assessments. This category also includes seized monies of $2 million
and $3 million as of September 30, 2001 and 2000, respectively, which
are held pending the results of criminal investigations. As described
in Note 12, other custodial assets are classified as "Non-Entity
Assets" and are offset by an equal liability in other custodial
liabilities.
The Federal tax lien revolving fund primarily consists of real
property held for resale to the public. In accordance with Section
7425 of the Internal Revenue Code and Section 2410 of Title 28, the
revolving fund can be used to redeem real property foreclosed upon by
a holder of a lien, which is superior to the tax lien. Real property
is redeemed when the Service pays the lien holder the amount bid at
sale plus interest and certain post-sale expenses. The Service may
then sell the property, reimburse the fund, and apply the net proceeds
to the outstanding tax obligation.
Note 5. Federal Taxes Receivable, Net:
Federal taxes receivable (gross) was $80 billion and $81 billion as of
September 30, 2001 and 2000, respectively, and consisted of tax
assessments, penalties, and interest that were not paid or abated, and
which were agreed to by the taxpayer and the Service, or upheld by the
courts.
Federal taxes receivable (net) equaled $20 billion and $22 billion as
of September 30, 2001 and 2000, respectively, and is the portion of
federal taxes receivable (gross) estimated to be collectible. It is
based on projections of collectibility from a statistical sample of
taxes receivable. An allowance for doubtful accounts of $60 billion
and $59 billion was established in FY 2001 and FY 2000, respectively,
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, representing amounts to be
transferred to Treasury when collected.
Note 6. Property and Equipment (In Millions):
Property and equipment as of September 30, 2001 and 2000 consist of
the following:
Category: ADP assets;
Useful Life: 3 to 7 Years;
Net Book Value/Cost: $1,172;
Accumulated Depreciation: ($491);
Net Book Value 9/30/2001: $681;
Net Book Value 9/30/2000: $584.
Category: Furniture and non-ADP equipment;
Useful Life: 8 to 10 Years;
Net Book Value/Cost: $56;
Accumulated Depreciation: ($14);
Net Book Value 9/30/2001: $42;
Net Book Value 9/30/2000: $47.;
Category: Investigative equipment;
Useful Life: 10 Years;
Net Book Value/Cost: $11;
Accumulated Depreciation: ($4);
Net Book Value 9/30/2001: $7;
Net Book Value 9/30/2000: $9.
Category: Vehicles;
Useful Life: 5 Years;
Net Book Value/Cost: $68;
Accumulated Depreciation: ($37);
Net Book Value 9/30/2001: $31;
Net Book Value 9/30/2000: $39.
Category: Subtotals;
Net Book Value/Cost: $1,307;
Accumulated Depreciation: ($546);
Net Book Value 9/30/2001: $761;
Net Book Value 9/30/2000: $679.
Category: Major systems;
Useful Life: 7 Years;
Net Book Value/Cost: $423;
Accumulated Depreciation: ($92);
Net Book Value 9/30/2001: $331;
Net Book Value 9/30/2000: $361.
Category: Major systems ” work in process;
Useful Life: [Empty];
Net Book Value/Cost: [Empty];
Accumulated Depreciation: [Empty];
Net Book Value 9/30/2001: [Empty];
Net Book Value 9/30/2000: $28.
Category: Internal use software;
Useful Life: 7 Years;
Net Book Value/Cost: $26;
Accumulated Depreciation: ($2);
Net Book Value 9/30/2001: $24;
Net Book Value 9/30/2000: [Empty].
Category: Internal use software ” work in process;
Useful Life: [Empty];
Net Book Value/Cost: $52;
Accumulated Depreciation: [Empty];
Net Book Value 9/30/2001: $52;
Net Book Value 9/30/2000: [Empty].
Category: Leasehold improvements;
Useful Life: 10 Years;
Net Book Value/Cost: $287;
Accumulated Depreciation: (74);
Net Book Value 9/30/2001: $213;
Net Book Value 9/30/2000: $197.
Category: Construction in progress;
Useful Life: [Empty];
Net Book Value/Cost: [Empty];
Accumulated Depreciation: [Empty];
Net Book Value 9/30/2001: [Empty];
Net Book Value 9/30/2000: $1.
Category: Total Property and Equipment;
Net Book Value/Cost: $2,095;
Accumulated Depreciation: ($714);
Net Book Value 9/30/2001: $1,381;
Net Book Value 9/30/2000: $1,266.
The Net Book Value/Cost column for property and equipment represents
the combination of (1) net book value of certain property and
equipment acquired before October 1, 1999, derived from estimates, as
discussed in Note 1; and (2) the actual cost of other property and
equipment.
The net book value of property and equipment derived from estimates--
item (1) above--consists of the following:
Category: ADP assets;
Useful Life: 3 to 7 Years;
Net Book Value/Cost: $668;
Accumulated Depreciation: ($405);
Net Book Value 9/30/2001: $263;
Net Book Value 9/30/2000: $413.
Category: Furniture and non-ADP equipment;
Useful Life: 8 to 10 Years;
Net Book Value/Cost: $16;
Accumulated Depreciation: ($5);
Net Book Value 9/30/2001: $11;
Net Book Value 9/30/2000: $13.
Category: Investigative equipment;
Useful Life: 10 Years;
Net Book Value/Cost: $11;
Accumulated Depreciation: ($4);
Net Book Value 9/30/2001: $7;
Net Book Value 9/30/2000: $9.
Category: Vehicles;
Useful Life: 5 Years;
Net Book Value/Cost: $48;
Accumulated Depreciation: ($33);
Net Book Value 9/30/2001: $15;
Net Book Value 9/30/2000: $31.
Category: Total Property and Equipment;
Net Book Value/Cost: $743;
Accumulated Depreciation: ($447);
Net Book Value 9/30/2001: $296;
Net Book Value 9/30/2000: $466.
Property and equipment acquired through capital leases are included in
the categories below. Disclosures concerning associated capital lease
liabilities are provided in Note 9.
Category: ADP assets:
Category: Mainframe consolidation;
Useful Life: 7 Years;
Net Book Value/Cost: $80;
Accumulated Depreciation: ($28);
Net Book Value 9/30/2001: $52;
Net Book Value 9/30/2000: $63.
Category: ADP Equipment;
Useful Life: 7 years;
Net Book Value/Cost: $7;
Accumulated Depreciation: [Empty];
Net Book Value 9/30/2001: $7;
Net Book Value 9/30/2000: [Empty].
Category: Software licenses;
Useful Life: 3 to 7 Years;
Net Book Value/Cost: $125;
Accumulated Depreciation: ($17);
Net Book Value 9/30/2001: $108;
Net Book Value 9/30/2000: [Empty].
Subtotals:
Net Book Value/Cost: $212;
Accumulated Depreciation: ($45);
Net Book Value 9/30/2001: $167;
Net Book Value 9/30/2000: $63.
Category: Furniture and Non-ADP Equipment:
Category: Mail sorters;
Useful Life: 10 Years;
Net Book Value/Cost: $19;
Accumulated Depreciation: ($5);
Net Book Value 9/30/2001: $14;
Net Book Value 9/30/2000: $16.
Category: Photocopiers;
Useful Life: 10 Years;
Net Book Value/Cost: $4;
Accumulated Depreciation: ($1);
Net Book Value 9/30/2001: $3;
Net Book Value 9/30/2000: $3.
Subtotals:
Net Book Value/Cost: $23;
Accumulated Depreciation: ($6);
Net Book Value 9/30/2001: $17;
Net Book Value 9/30/2000: $19.
Totals:
Net Book Value/Cost: $235;
Accumulated Depreciation: ($51);
Net Book Value 9/30/2001: $184; Net
Book Value 9/30/2000: $82.
Note 7. Accounts Payable and Accrued Expenses (In Millions):
Accounts payable and accrued expenses as of September 30, 2001 and
2000, consist of the following:
Accounts payable:
2001 Intra-Governmental: [Empty];
2001 With the Public: $27;
2000 Intra-Governmental: [Empty];
2000 With the Public: $43.
Accrued expenses:
2001 Intra-Governmental: $43;
2001 With the Public: $301;
2000 Intra-Governmental: $30;
2000 With the Public: $233.
Accrued payroll and benefits:
2001 Intra-Governmental: $46;
2001 With the Public: $307;
2000 Intra-Governmental: $41;
2000 With the Public: $280.
Total Accounts Payable and Accrued Expenses:
2001 Intra-Governmental: $89;
2001 With the Public: $635;
2000 Intra-Governmental: $71;
2000 With the Public: $556.
Note 8. Other Liabilities (In Millions):
Other liabilities as of September 30, 2001 and 2000, consist of the
following:
Workers' compensation:
2001 Intra-Governmental: $85;
2001 With the Public: $513;
2000 Intra-Governmental: $82;
2000 With the Public: $440.
Accrued annual leave:
2001 Intra-Governmental: [Empty];
2001 With the Public: $367;
2000 Intra-Governmental: [Empty];
2000 With the Public: $382.
Suspense:
2001 Intra-Governmental: ($4);
2001 With the Public: [Empty];
2000 Intra-Governmental: $5;
2000 With the Public: [Empty].
Other custodial liabilities:
2001 Intra-Governmental: [Empty];
2001 With the Public: $191;
2000 Intra-Governmental: [Empty];
2000 With the Public: $87.
Total Other Liabilities:
2001 Intra-Governmental: $81;
2001 With the Public: $1,071;
2000 Intra-Governmental: $87;
2000 With the Public: $909.
Workers' compensation is paid to employees injured on the job or
incurring work-related illnesses, as required by the Federal Employees
Compensation Act (Act). The Act provides income, medical cost
protection, and death benefits to covered federal civilian employees
and their beneficiaries. The program is administered by the U.S.
Department of Labor, which initially pays valid claims and
subsequently seeks reimbursement from federal agencies. The liability
of $598 million at September 30, 2001 includes a current portion of
$85 million and estimated future costs of $513 million. As of
September 30, 2000, the liability of $522 million includes a current
portion of $82 million and estimated future costs of $440 million.
Estimated future costs have been actuarially determined, and are
regarded as a liability to the public because neither the costs nor
reimbursement have been recognized by the Department of Labor.
Workers' Compensation is included in Liabilities Not Covered by
Budgetary Resources, as described in Note 13.
Accrued annual leave consists of employees' unpaid leave balances at
September 30, 2001 and 2000, and reflects wage rates in effect at
fiscal year end. Accrued annual leave is included in Liabilities Not
Covered by Budgetary Resources, as described in Note 13.
Other custodial liabilities (the offsetting liability to other
custodial assets) primarily consist of liabilities to taxpayers for
deposits pending application of the funds to outstanding tax
deficiencies and liability for seized monies.
Note 9. Leases (In Millions):
The capital lease liability as of September 30, 2001, is as follows:
Mainframe consolidation
Total: [Empty];
2002: [Empty];
2003: [Empty];
2004: [Empty];
2005 and Beyond: [Empty].
Mail sorters:
Total: $11;
2002: $6;
2003: $5;
2004: [Empty];
2005 and Beyond: [Empty].
Copiers and other:
Total: $10;
2002: $4;
2003: $3;
2004: $3;
2005 and Beyond: [Empty].
Software licenses:
Total: $124;
2002: $39;
2003: $40;
2004: $33;
2005 and Beyond: $12.
Total Lease Obligations:
Total: $145;
2002: $49;
2003: $48;
2004: $36;
2005 and Beyond: $12.
Less: Interest:
Total: ($20).
Present Value of Lease Payments:
Total: $125.
The capital lease liability as of September 30, 2000, is as
follows:
Mainframe consolidation:
Total: $14;
2001: $13;
2002: $1;
2003: [Empty].
Mail sorters:
Total: $10;
2001: $4;
2002: $4;
2003: $2.
Copiers and other:
Total: $2;
2001: $1;
2002: $1;
2003: [Empty].
Total Lease Obligations:
Total: $26;
2001: $18;
2002: $6;
2003: $2.
Less: Interest:
Total: $(5).
Present Value of Lease Payments:
Total: $21.
In fiscal years 2001 and 2000, certain computer equipment related to
the Mainframe Consolidation Project, mail sorters, copiers and other
equipment is leased under Lease-To-Ownership-Plans. The original terms
of these LTOPs provide for 36 monthly payments for computers, and from
36 to 60 monthly payments for other equipment. Under each LTOP, the
equipment is owned as of the last monthly payment. Interest rates
range from 5 to 11 percent.
In fiscal year 2001, the Service exercised its option to purchase
computer equipment related to the Mainframe Consolidation Project and
retired all remaining capital lease liabilities on this equipment.
Beginning in fiscal year 2001, new capital lease liabilities for
copiers and other equipment are included in funded liabilities. Prior
to fiscal year 2001, capital lease liabilities for copiers and
equipment are included in Liabilities Not Covered by Budgetary
Resources. As of September 30, 2001, this resulted in $10 million in
funded liabilities and $115 million in Liabilities Not Covered by
Budgetary Resources.
Beginning in fiscal year 2001, capital lease treatment is accorded to
computer software leased under software licensing agreements. These
licensing agreements provide for payments over periods ranging from
three to six years. The liability reported represents the net present
value of future lease payments, and is included in Liabilities Not
Covered by Budgetary Resources. The effect of applying capital lease
treatment to software licenses in FY2001 is to 1) capitalize software
licenses of $ 125 million, 2) recognize current depreciation/
amortization of $17 million, and 3) reduce monthly lease payments
included in operating expenses by $24 million, resulting in an overall
reduction of net cost of $7 million.
The Service leases office space, vehicles and equipment under annual
operating leases. These leases are cancelable or renewable on an
annual basis at the option of the Service. They do not impose binding
commitments on the Service for future rental payments on leases with
terms longer than one year.
Note 10. Contingencies:
As of September 30, 2001 and 2000, the Service provided an accrual for
contingent losses of $6 million and $12 million, respectively, for
pending and threatened legal matters that, in the opinion of Chief
Counsel, are considered probable. No additional losses are considered
probable by Chief Counsel. Of these amounts, certain settlements and
awards may be payable from the Treasury Judgment Fund in accordance
with 31 U.S.C. 1304. For fiscal year 2001, of the $6 million accrued
by the Service, $6 million is estimated to be payable from the
Treasury Judgment Fund for settlements and awards relating to these
claims. For fiscal year 2000, of the $12 million accrued by the
Service, all was estimated to be payable from the Treasury Judgment
Fund for settlements and awards relating to those claims.
The Service does not have contractual commitments for payments on
obligations related to canceled appropriations.
Note 11. Reobligation of Funds:
Obligations incurred in fiscal years 2001 and 2000 include upward
adjustments of obligations established in earlier fiscal years of $153
million and $26 million, respectively. In part, the increase in upward
adjustments in FY 2001 resulted from reobligation of amounts
deobligated in FY 2000. During FY 2000, undelivered orders were
deobligated based on a review of open obligations. In FY 2001, based
on additional information, the Service reobligated a portion of the
deobligated orders. Reobligations account for $76 million of the total
upward adjustments of $153 million in FY 2001, and $5 million of total
upward adjustments of $26 million in FY 2000.
Note 12. Non-entity Assets (In Millions):
Non-entity assets arise from the Service's custodial duty to collect
taxes, disburse tax refunds and maintain proper accounting for these
activities in the books and records of the Service. Non-entity assets
as of September 30, 2001 and 2000, consist of the following:
Due from Treasury:
2001 Intra-Governmental: $1,419;
2001 With the Public: [Empty];
2000 Intra-Governmental: $1,040;
2000 With the Public: [Empty].
Federal taxes receivable, net of Allowance for doubtful accounts: 2001
Intra-Governmental: [Empty];
2001 With the Public: $20,000;
2000 Intra-Governmental: [Empty];
2000 With the Public: $22,000.
Other custodial assets:
2001 Intra-Governmental: [Empty];
2001 With the Public: $191;
2000 Intra-Governmental: [Empty];
2000 With the Public: $87.
Due from Treasury represents tax refunds due to taxpayers but not
disbursed as of September 30, 2001 and 2000.
Federal taxes receivable are transferred to Treasury upon receipt. An
amount equal to federal taxes receivable has been recognized as an
offsetting intragovernmental liability ” Due to Treasury. Federal
taxes receivable is described in more detail in Note 5.
Other custodial assets, also discussed in Note 4, primarily relate to
the deposits received from taxpayers, pending application of the funds
to unpaid tax assessments and seized monies.
Note 13. Liabilities Not Covered by Budgetary Resources (In Millions):
Liabilities not covered by budgetary resources as of September 30,
2001 and 2000, consist of the following:
Workers' compensation:
2001 Intra-Governmental: $85;
2001 With the Public: $513;
2000 Intra-Governmental: $82;
2000 With the Public: $440.
Accrued annual leave:
2001 Intra-Governmental: [Empty];
2001 With the Public: $367;
2000 Intra-Governmental: [Empty];
2000 With the Public: $382;
Contingencies:
2001 Intra-Governmental: [Empty];
2001 With the Public: $6;
2000 Intra-Governmental: [Empty];
2000 With the Public: $12.
Capital lease liability:
2001 Intra-Governmental: [Empty];
2001 With the Public: $115;
2000 Intra-Governmental: [Empty];
2000 With the Public: $21.
Liabilities not covered by budgetary resources are liabilities that
are not funded by direct budgetary authority and result from the
receipt of goods and services, or the occurrence of eligible events,
for which appropriations, revenues, or other financing sources
necessary to pay the liabilities have not yet been made available
through Congressional appropriation. See Note 8 for further
description of workers' compensation and accrued annual leave, Note 9
for capital lease liability and Note 10 for contingencies.
Note 14. Comparison of Statement of Budgetary Resources and the
President's Budget (In Millions):
Balances reported in the Statement of Budgetary Resources and the
President's Budget are shown in the table below for each of the major
appropriations, the Information Technology Investment Account, and the
Earned Income Tax Credit appropriation. The table excludes other
minor appropriations.
There are significant differences between the Statement of Budgetary
Resources and the President's Budget that are attributable to
differing requirements imposed by Treasury and OMB. The differences
are due to reporting requirement differences between the Treasury
guidance used to prepare the Statement of Budgetary Resources and the
OMB guidance used to prepare the President's Budget. For example, the
President's Budget includes full funding for retiree costs, which are
excluded from the Statement of Budgetary Resources. Additionally, the
differences are attributable to the fact that budgetary information is
submitted for the President's Budget prior to completion of most
agency audits (timing differences) causing audit adjustments not to be
reflected in the President's Budget balances. Balances on the
Unobligated ” unavailable line of the President's Budget included in
the Service's FY 2000 financial statements have been restated as
unobligated ” available in order to comply with OMB guidance.
Processing Assistance and Management:
Budget authority:
FY 2001: Statement of Budgetary Resources: $3,755;
FY 2001: President's Budget: $3,914;
FY 2000: Statement of Budgetary Resources: $3,376;
FY 2000: President's Budget: $3,380.
Unobligated balances ” beginning of period:
FY 2001: Statement of Budgetary Resources: $168;
FY 2001: President's Budget: $20;
FY 2000: Statement of Budgetary Resources: $143;
FY 2000: President's Budget: $13.
Spending authority from offsetting Collections:
FY 2001: Statement of Budgetary Resources: $27;
FY 2001: President's Budget: $32;
FY 2000: Statement of Budgetary Resources: $28;
FY 2000: President's Budget: $27.
Adjustments:
FY 2001: Statement of Budgetary Resources: $24;
FY 2001: President's Budget: $21;
FY 2000: Statement of Budgetary Resources: ($22);
FY 2000: President's Budget: ($32).
Total Budgetary Resources
FY 2001: Statement of Budgetary Resources: $3,974;
FY 2001: President's Budget: $3,987;
FY 2000: Statement of Budgetary Resources: $3,525;
FY 2000: President's Budget: $3,388.
Status of Budgetary Resources:
Obligations incurred:
FY 2001: Statement of Budgetary Resources: $3,800;
FY 2001: President's Budget: $3,934;
FY 2000: Statement of Budgetary Resources: $3,357;
FY 2000: President's Budget: $3,360.
Unobligated balances ” available:
FY 2001: Statement of Budgetary Resources: $58;
FY 2001: President's Budget: $53;
FY 2000: Statement of Budgetary Resources: $20;
FY 2000: President's Budget: $28.
Unobligated balances ” unavailable:
FY 2001: Statement of Budgetary Resources: $116;
FY 2001: President's Budget: [Empty];
FY 2000: Statement of Budgetary Resources: $148;
FY 2000: President's Budget: [Empty].
Total Status of Budgetary Resources:
FY 2001: Statement of Budgetary Resources: $3,974;
FY 2001: President's Budget: $3,987;
FY 2000: Statement of Budgetary Resources: $3,525;
FY 2000: President's Budget: $3,388.
Outlays:
FY 2001: Statement of Budgetary Resources: $3,560;
FY 2001: President's Budget: $3,719;
FY 2000: Statement of Budgetary Resources: $3,318;
FY 2000: President's Budget: $3,324.
Tax Law Enforcement:
Budget authority:
FY 2001: Statement of Budgetary Resources: $3,450;
FY 2001: President's Budget: $3,673;
FY 2000: Statement of Budgetary Resources: $3,283;
FY 2000: President's Budget: $3,285.
Unobligated balances - beginning of period:
FY 2001: Statement of Budgetary Resources: $90;
FY 2001: President's Budget: [Empty];
FY 2000: Statement of Budgetary Resources: $76;
FY 2000: President's Budget: [Empty].
Spending authority from offsetting Collections:
FY 2001: Statement of Budgetary Resources: $80;
FY 2001: President's Budget: $101;
FY 2000: Statement of Budgetary Resources: $61;
FY 2000: President's Budget: $62.
Adjustments:
FY 2001: Statement of Budgetary Resources: ($7);
FY 2001: President's Budget: $5;
FY 2000: Statement of Budgetary Resources: [Empty];
FY 2000: President's Budget: [Empty].
Total Budgetary Resources:
FY 2001: Statement of Budgetary Resources: $3,613;
FY 2001: President's Budget: $3,779;
FY 2000: Statement of Budgetary Resources: $3,420;
FY 2000: President's Budget: $3,347.
Status of Budgetary Resources:
Obligations incurred:
FY 2001: Statement of Budgetary Resources: $3,548;
FY 2001: President's Budget: $3,753;
FY 2000: Statement of Budgetary Resources: $3,330;
FY 2000: President's Budget: $3,342.
Unobligated balances - available:
FY 2001: Statement of Budgetary Resources: $13;
FY 2001: President's Budget: $26;
FY 2000: Statement of Budgetary Resources: [Empty];
FY 2000: President's Budget: $5.
Unobligated balances - unavailable:
FY 2001: Statement of Budgetary Resources: $52;
FY 2001: President's Budget: [Empty];
FY 2000: Statement of Budgetary Resources: $90;
FY 2000: President's Budget: [Empty].
Total Status of Budgetary Resources:
FY 2001: Statement of Budgetary Resources: $3,613;
FY 2001: President's Budget: $3,779;
FY 2000: Statement of Budgetary Resources: $3,420;
FY 2000: President's Budget: $3,347.
Outlays:
FY 2001: Statement of Budgetary Resources: $3,437;
FY 2001: President's Budget: $3,660;
FY 2000: Statement of Budgetary Resources: $3,205;
FY 2000: President's Budget: $3,204.
Information Systems:
Budgetary Resources:
Budget authority:
FY 2001: Statement of Budgetary Resources: $1,608;
FY 2001: President's Budget: $1,649;
FY 2000: Statement of Budgetary Resources: $1,502;
FY 2000: President's Budget: $1,502.
Unobligated balances - beginning of period:
FY 2001: Statement of Budgetary Resources: $187;
FY 2001: President's Budget: $53;
FY 2000: Statement of Budgetary Resources: $209;
FY 2000: President's Budget: $22.
Spending authority from offsetting Collections:
FY 2001: Statement of Budgetary Resources: $3;
FY 2001: President's Budget: $6;
FY 2000: Statement of Budgetary Resources: $12;
FY 2000: President's Budget: $9.
Adjustments:
FY 2001: Statement of Budgetary Resources: ($6);
FY 2001: President's Budget: $106;
FY 2000: Statement of Budgetary Resources: $9;
FY 2000: President's Budget: $71.
Total Budgetary Resources:
FY 2001: Statement of Budgetary Resources: $1,792;
FY 2001: President's Budget: $1,814;
FY 2000: Statement of Budgetary Resources: $1,732;
FY 2000: President's Budget: $1,604.
Status of Budgetary Resources:
Obligations incurred:
FY 2001: Statement of Budgetary Resources: $1,700;
FY 2001: President's Budget: $1,774;
FY 2000: Statement of Budgetary Resources: $1,545;
FY 2000: President's Budget: $1,544.
Unobligated balances - available:
FY 2001: Statement of Budgetary Resources: $27;
FY 2001: President's Budget: $40;
FY 2000: Statement of Budgetary Resources: $90;
FY 2000: President's Budget: $60.
Unobligated balances - unavailable:
FY 2001: Statement of Budgetary Resources: $65;
FY 2001: President's Budget: [Empty];
FY 2000: Statement of Budgetary Resources: $97;
FY 2000: President's Budget: [Empty].
Total Status of Budgetary Resources:
FY 2001: Statement of Budgetary Resources: $1,792;
FY 2001: President's Budget: $1,814;
FY 2000: Statement of Budgetary Resources: $1,732;
FY 2000: President's Budget: $1,604.
Outlays:
FY 2001: Statement of Budgetary Resources: $1,501;
FY 2001: President's Budget: $1,540;
FY 2000: Statement of Budgetary Resources: $1,649;
FY 2000: President's Budget: $1,649.
Information Technology Investment Account:
Budget authority:
FY 2001: Statement of Budgetary Resources: $165;
FY 2001: President's Budget: $166;
FY 2000: Statement of Budgetary Resources: [Empty];
FY 2000: President's Budget: [Empty].
Unobligated balances ” beginning of period:
FY 2001: Statement of Budgetary Resources: $305;
FY 2001: President's Budget: $211;
FY 2000: Statement of Budgetary Resources: $481;
FY 2000: President's Budget: $480.
Spending authority from offsetting Collections:
FY 2001: Statement of Budgetary Resources: [Empty];
FY 2001: President's Budget: [Empty];
FY 2000: Statement of Budgetary Resources: [Empty];
FY 2000: President's Budget: [Empty].
Adjustments:
FY 2001: Statement of Budgetary Resources: ($91);
FY 2001: President's Budget: [Empty];
FY 2000: Statement of Budgetary Resources: [Empty];
FY 2000: President's Budget: [Empty];
Total Budgetary Resources:
FY 2001: Statement of Budgetary Resources: $379;
FY 2001: President's Budget: $377;
FY 2000: Statement of Budgetary Resources: $481;
FY 2000: President's Budget: $480.
Status of Budgetary Resources:
Obligations incurred:
FY 2001: Statement of Budgetary Resources: $301;
FY 2001: President's Budget: $299;
FY 2000: Statement of Budgetary Resources: $176;
FY 2000: President's Budget: $176.
Unobligated balances ” available:
FY 2001: Statement of Budgetary Resources: $78;
FY 2001: President's Budget: $78;
FY 2000: Statement of Budgetary Resources: $211;
FY 2000: President's Budget: $304.
Unobligated balances ” unavailable:
FY 2001: Statement of Budgetary Resources: [Empty];
FY 2001: President's Budget: [Empty];
FY 2000: Statement of Budgetary Resources: $94;
FY 2000: President's Budget: [Empty];
Total Status of Budgetary Resources:
FY 2001: Statement of Budgetary Resources: $379;
FY 2001: President's Budget: $377;
FY 2000: Statement of Budgetary Resources: $481;
FY 2000: President's Budget: $480.
Outlays
FY 2001: Statement of Budgetary Resources: $231;
FY 2001: President's Budget: $231;
FY 2000: Statement of Budgetary Resources: $76;
FY 2000: President's Budget: $76.
Earned Income Tax Credit:
Budgetary Resources:
Budget authority:
FY 2001: Statement of Budgetary Resources: $145;
FY 2001: President's Budget: $152;
FY 2000: Statement of Budgetary Resources: $144;
FY 2000: President's Budget: $144.
Unobligated balances ” beginning of period:
FY 2001: Statement of Budgetary Resources: $16;
FY 2001: President's Budget: [Empty];
FY 2000: Statement of Budgetary Resources: $12;
FY 2000: President's Budget: [Empty].
Spending authority from offsetting Collections:
FY 2001: Statement of Budgetary Resources: [Empty];
FY 2001: President's Budget: [Empty];
FY 2000: Statement of Budgetary Resources: [Empty];
FY 2000: President's Budget: [Empty].
Adjustments:
FY 2001: Statement of Budgetary Resources: ($1);
FY 2001: President's Budget: [Empty];
FY 2000: Statement of Budgetary Resources: ($1);
FY 2000: President's Budget: [Empty].
Total Budgetary Resources:
FY 2001: Statement of Budgetary Resources: $160;
FY 2001: President's Budget: $152;
FY 2000: Statement of Budgetary Resources: $155;
FY 2000: President's Budget: $144.
Status of Budgetary Resources:
Obligations incurred:
FY 2001: Statement of Budgetary Resources: $144;
FY 2001: President's Budget: $149;
FY 2000: Statement of Budgetary Resources: $139;
FY 2000: President's Budget: $140.
Unobligated balances ” available:
FY 2001: Statement of Budgetary Resources: $3;
FY 2001: President's Budget: $3;
FY 2000: Statement of Budgetary Resources: $5;
FY 2000: President's Budget: $4.
Unobligated balances ” unavailable:
FY 2001: Statement of Budgetary Resources: $13;
FY 2001: President's Budget: [Empty];
FY 2000: Statement of Budgetary Resources: $11;
FY 2000: President's Budget: [Empty].
Total Status of Budgetary Resources:
FY 2001: Statement of Budgetary Resources: $160;
FY 2001: President's Budget: $152;
FY 2000: Statement of Budgetary Resources: $155;
FY 2000: President's Budget: $144.
Outlays:
FY 2001: Statement of Budgetary Resources: $146;
FY 2001: President's Budget: $153;
FY 2000: Statement of Budgetary Resources: $135;
FY 2000: President's Budget: $135.
Note 15. Collections of Federal Tax Revenue (In Billions):
The Service transfers total tax collections to the U.S. Treasury.
Collection activity, by financial statement line item and tax year,
was as follows for the fiscal year ended September 30, 2001 and 2000:
Individual income, FICA/SECA, and other: Tax Year
2001: $1,155[A];
Tax Year 2000: $666;
Tax Year 1999: $14;
Prior Years: $9;
Collections Received FY 2001: $1,844;
Collections Received FY 2000: $1,765.
Corporate income:
Tax Year 2001: $99[B];
Tax Year 2000: $80;
Tax Year 1999: $1;
Prior Years: $7;
Collections Received FY 2001: $187;
Collections Received FY 2000: $235.
Excise:
Tax Year 2001: $37;
Tax Year 2000: $15;
Tax Year 1999: [Empty];
Prior Years: [Empty];
Collections Received FY 2001: $52;
Collections Received FY 2000: $55.
Estate and gift:
Tax Year 2001: $1;
Tax Year 2000: $25;
Tax Year 1999: $1;
Prior Years: $2;
Collections Received FY 2001: $29;
Collections Received FY 2000: $29.
Railroad retirement:
Tax Year 2001: $4;
Tax Year 2000: $1;
Tax Year 1999: [Empty];
Prior Years: [Empty];
Collections Received FY 2001: $5;
Collections Received FY 2000: $5.
Federal unemployment:
Tax Year 2001: $5;
Tax Year 2000: $2;
Tax Year 1999: [Empty];
Prior Years: [Empty];
Collections Received FY 2001: $7;
Collections Received FY 2000: $7.
Total:
Tax Year 2001: $1,301 (61%);
Tax Year 2000: $789 (37%);
Tax Year 1999: $16 (1%);
Prior Years: $18 (1%);
Collections Received FY 2001: $2,124 (100%);
Collections Received FY 2000: $2,096.
[A] Includes other collections of $395 million.
[B] Includes tax year 2002 corporate income tax receipts of $5 billion.
In FY 2001, Individual income, FICA/SECA, and other taxes include $56
billion in payroll taxes collected from other federal agencies. Of
this amount, $12 billion represents the portion paid by the employers.
Note 16. Federal Tax Refund Activity (In Billions):
Refund activity, broken out similarly to collection activity by tax
year, was as follows for the fiscal years ended September 30, 2001 and
2000:
Individual income, FICA/SECA, and other:
Tax Year 2001: $2;
Tax Year 2000: $196;
Tax Year 1999: $9;
Prior Years: $4;
Refunds Dispersed FY 2001: $211;
Refunds Dispersed FY 2000: $161.
Corporate income:
Tax Year 2001: $1;
Tax Year 2000: $15;
Tax Year 1999: $8;
Prior Years: $14;
Refunds Dispersed FY 2001: $38;
Refunds Dispersed FY 2000: $31.
Excise:
Tax Year 2001: [Empty];
Tax Year 2000: $1;
Tax Year 1999: [Empty];
Prior Years: [Empty];
Refunds Dispersed FY 2001: $1;
Refunds Dispersed FY 2000: $1.
Estate and gift:
Tax Year 2001: [Empty];
Tax Year 2000: [Empty];
Tax Year 1999: $1;
Prior Years: [Empty];
Refunds Dispersed FY 2001: $1;
Refunds Dispersed FY 2000: $1.
Railroad retirement:
Tax Year 2001: [Empty];
Tax Year 2000: [Empty];
Tax Year 1999: [Empty];
Prior Years: [Empty];
Refunds Dispersed FY 2001: [Empty];
Refunds Dispersed FY 2000: [Empty].
Federal unemployment:
Tax Year 2001: [Empty];
Tax Year 2000: [Empty];
Tax Year 1999: [Empty];
Prior Years: [Empty];
Refunds Dispersed FY 2001: [Empty];
Refunds Dispersed FY 2000: [Empty].
Total:
Tax Year 2001: $3 (1%);
Tax Year 2000: $212 (85%);
Tax Year 1999: $18 (7%);
Prior Years: $18 (7%);
Refunds Dispersed FY 2001: $251 (100%);
Refunds Dispersed FY 2000:
$194.
Individual income, FICA/SECA, and other refund amounts include EITC
and child tax credit refunds.
In FY 2001, Refunds Disbursed includes $36 billion in special tax
rebates, as required by the Economic Growth and Tax Relief
Reconciliation Act (Public Law 107-16), effective for tax year 2001.
Note 17. Budget Functional Classification (In Millions):
Budget Functional Classification:
Gross cost and earned revenue for the Service are classified under the
budget functional classification of General Government under the
President's budget. Gross cost and earned revenue are categorized as
follows:
Gross Cost:
Intragovernmental: $2,161;
With the Public: $7,373;
Total: $9,534.
Earned Revenue:
Intragovernmental: ($109);
With the Public: ($127);
Total: ($236).
Net Cost:
Intragovernmental: $2,052;
With the Public: $7,246;
Total: $9,298.
Note 18. Budgetary Rescissions:
Adjustments in the Budgetary Resources section of the Statement of
Budgetary Resources comprise rescissions of budget authority, canceled
appropriations, transfers, and recoveries of prior year obligations.
In FY 2001, Congress rescinded $131 million of the Service's
appropriations. Rescissions include $19 million under Public Law 106-
554, $18 million under Public Law 107-20, and $94 million under Public
Law 106-246. Public Law 106246 rescinded $94 million from the FY 1998
Information Technology Investment appropriation and re-appropriated it
to the FY 2001 Information Technology Investment appropriation. In FY
2000, Congress rescinded $32 million of the Service's appropriations
under Public Law 106-113.
[End of Notes to the Financial Statements]
Supplemental and Other Accompanying Information:
Internal Revenue Service:
Supplemental Information - Unaudited: For the Fiscal Years Ended
September 30, 2001 and 2000:
Other Claims for Refund:
Management has estimated amounts that may be paid out as other claims
for tax refunds. This estimate represents an amount (principal and
interest) that may be paid for claims pending judicial review by the
Federal courts or, internally, by Appeals. In FY 2001, the total
estimated payout (including principal and interest) for claims pending
judicial review by the Federal courts is $7.7 billion and by Appeals
is $13.6 billion. In FY 2000, the total estimated payout (including
principal and interest) for claims pending judicial review by the
Federal courts is $8.4 billion and by Appeals is $13.5 billion.
Although these refund claims have been deemed to be probable, they do
not meet the criteria in SFFAS No. 5 for reporting the amounts in the
balance sheet or for disclosure in the notes to the financial
statements. However, they meet the criteria in SFFAS No. 7 for
inclusion as supplemental information. 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 Billions):
In accordance with SFFAS No. 7, some unpaid assessments do not meet
the criteria for financial statement recognition as discussed in Note
1 to the financial statements. 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 at September 30, 2001 and 2000 were as
follows:
Total unpaid assessments:
2001: $239;
2000: $240.
Less: Compliance assessments:
2001: ($22);
2000: ($30).
Write-offs:
2001: ($137);
2000: ($129).
Gross Federal Taxes Receivable:
2001: $80;
2000: $81.
Less: Allowance for doubtful accounts:
2001: ($60);
2000: ($59).
Federal Taxes Receivable, Net:
2001: $20;
2000: $22.
The Service cannot reasonably estimate the amount of allowance for
doubtful accounts 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 $14 billion and
$14 billion as of September 30, 2001 and 2000, respectively, 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 Service 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.
Earned Income Tax Credit:
The EITC was originally authorized by the Tax Reduction Act of 1975
(Public Law 94-12) and made permanent by the Revenue Act of 1978
(Public Law 95-600). The EITC is a special credit for taxpayers who
work and whose earnings fall below the established allowance ceiling.
Qualified taxpayers can receive partial credit in advance in each
paycheck. In fiscal year 2001, the Service issued $26.1 billion in
EITC refunds, of which $72 million was applied to advance EITC. In
fiscal year 2000, the Service issued $26.1 billion in EITC refunds, of
which $81.0 million was applied to advance EITC. An additional $5.1
billion and $5.1 billion of the EITC was applied to reduce taxpayer
liability for fiscal years 2001 and 2000, respectively.
Intra-Governmental Assets (In Millions):
Fiscal Year 2001:
Agency: Treasury;
Fund Balance with Treasury: $2,067;
Due from Treasury: $1,419;
Accounts Receivable, Net: $27;
Advances to Government Agencies: $128.
Agency: Other;
Fund Balance with Treasury: [Empty];
Due from Treasury: [Empty];
Accounts Receivable, Net: $6;
Advances to Government Agencies: [Empty].
Agency: Total;
Fund Balance with Treasury: $2,067;
Due from Treasury: $1,419;
Accounts Receivable, Net: $33;
Advances to Government Agencies: $128.
Fiscal Year 2000:
Agency: Treasury;
Fund Balance with Treasury: $2,005;
Due from Treasury: $1,040;
Accounts Receivable, Net: $7;
Advances to Government Agencies: $122.
Agency: Other;
Fund Balance with Treasury: [Empty];
Due from Treasury: [Empty];
Accounts Receivable, Net: $4;
Advances to Government Agencies: $41;
Agency: Total;
Fund Balance with Treasury: $2,005;
Due from Treasury: $1,040;
Accounts Receivable, Net: $11;
Advances to Government Agencies: $163.
Intra-Governmental Assets (In Millions):
Fiscal Year 2001
Agency: Treasury;
Due to Treasury: $20,000;
Accrued Expenses: $6;
Accrued Payroll and Benefits: [Empty];
Other Liabilities: [Empty].
Agency: Department of Labor;
Due to Treasury: [Empty];
Accrued Expenses: $8;
Accrued Payroll and Benefits: [Empty];
Other Liabilities: $85.
Agency: U.S. Postal Service;
Due to Treasury: [Empty];
Accrued Expenses: $20;
Accrued Payroll and Benefits: [Empty];
Other Liabilities: [Empty].
Agency: Office of Pers. Mgmt;
Due to Treasury: [Empty];
Accrued Expenses: $1;
Accrued Payroll and Benefits: $46;
Other Liabilities: [Empty].
Agency: Other;
Due to Treasury: [Empty];
Accrued Expenses: $8;
Accrued Payroll and Benefits: [Empty];
Other Liabilities: ($4).
Agency: Total;
Due to Treasury: $20,000;
Accrued Expenses: $43;
Accrued Payroll and Benefits: $46;
Other Liabilities: $81.
Fiscal Year 2000:
Agency: Treasury;
Due to Treasury: $22,000;
Accrued Expenses: [Empty];
Accrued Payroll and Benefits: [Empty];
Other Liabilities: [Empty].
Agency: General Services Adm;
Due to Treasury: [Empty];
Accrued Expenses: $7;
Accrued Payroll and Benefits: [Empty];
Other Liabilities: [Empty].
Agency: Department of Labor;
Due to Treasury: [Empty];
Accrued Expenses: [Empty];
Accrued Payroll and Benefits: [Empty];
Other Liabilities: $82.
Agency: Office of Pers. Mgmt;
Due to Treasury: [Empty];
Accrued Expenses: $10;
Accrued Payroll and Benefits: $41;
Other Liabilities: [Empty].
Agency: Other;
Due to Treasury: [Empty];
Accrued Expenses: $13;
Accrued Payroll and Benefits: [Empty];
Other Liabilities: $5.
Agency: Total;
Due to Treasury: $22,000;
Accrued Expenses: $30;
Accrued Payroll and Benefits: $41;
Other Liabilities: $87.
Schedule of Budgetary Resources by Major Budget Accounts (In Millions):
Fiscal Year 2001:
Budgetary Resources:
Budget authority:;
Processing Assistance & Management: $3,755;
Tax Law Enforcement: $3,450;
Information Services: $1,608;
Information Technology Investment Account and Other: $301;
Total: $9,114.
Unobligated balances ” beginning of period:
Processing Assistance & Management: $168;
Tax Law Enforcement: $90;
Information Services: $187;
Information Technology Investment Account and Other: $346;
Total: $791.
Spending authority from offsetting collections:
Processing Assistance & Management: $27;
Tax Law Enforcement: $80;
Information Services: $3;
Information Technology Investment Account and Other: $11;
Total: $121.
Adjustments:
Processing Assistance & Management: $24;
Tax Law Enforcement: ($7);
Information Services: ($6);
Information Technology Investment Account and Other: ($89);
Total: ($78).
Total Budgetary Resources:
Processing Assistance & Management: $3,974;
Tax Law Enforcement: $3,613;
Information Services: $1,792;
Information Technology Investment Account and Other: $569;
Total: $9,948.
Status of Budgetary Resources:
Obligations incurred:
Processing Assistance & Management: $3,800;
Tax Law Enforcement: $3,548;
Information Services: $1,700;
Information Technology Investment Account and Other: $459;
Total: $9,507.
Unobligated balances ” available:
Processing Assistance & Management: $58;
Tax Law Enforcement: $13;
Information Services: $27;
Information Technology Investment Account and Other: $98;
Total: $196.
Unobligated balances ” unavailable:
Processing Assistance & Management: $116;
Tax Law Enforcement: $52;
Information Services: $65;
Information Technology Investment Account and Other: $12;
Total: $245.
Total Status of Budgetary Resources:
Processing Assistance & Management: $3,974;
Tax Law Enforcement: $3,613;
Information Services: $1,792;
Information Technology Investment Account and Other: $569;
Total: $9,948.
Outlays:
Obligations incurred:
Processing Assistance & Management: $3,800;
Tax Law Enforcement: $3,548;
Information Services: $1,700;
Information Technology Investment Account and Other: $459;
Total: $9,507.
Less: spending authority from offsetting collections and adjustments:
Processing Assistance & Management: ($79);
Tax Law Enforcement: ($99);
Information Services: ($35);
Information Technology Investment Account and Other: ($18);
Total: ($231).
Obligated balances, net ” beginning of period:
Processing Assistance & Management: $395;
Tax Law Enforcement: $287;
Information Services: $395;
Information Technology Investment Account and Other: $155;
Total: $1,232.
Less: obligated balances, net ” end of period:
Processing Assistance & Management: ($556);
Tax Law Enforcement: ($299);
Information Services: ($559);
Information Technology Investment Account and Other: ($221);
Total: ($1,635).
Total Outlays:
Processing Assistance & Management: $3,560;
Tax Law Enforcement: $3,437;
Information Services: $1,501;
Information Technology Investment Account and Other: $375;
Total: $8,873.
Fiscal Year 2000:
Budgetary Resources:
Budget authority:
Processing Assistance & Management: $3,376;
Tax Law Enforcement: $3,283;
Information Services: $1,502;
Information Technology Investment Account and Other: $158;
Total: $8,319.
Unobligated balances ” beginning of period:
Processing Assistance & Management: $143;
Tax Law Enforcement: $76;
Information Services: $209;
Information Technology Investment Account and Other: $505;
Total: $933.
Spending authority from offsetting collections:
Processing Assistance & Management: $28;
Tax Law Enforcement: $61;
Information Services: $12;
Information Technology Investment Account and Other: $6;
Total: $107.
Adjustments:
Processing Assistance & Management: ($22);
Tax Law Enforcement: [Empty];
Information Services: $9;
Information Technology Investment Account and Other: $1;
Total: ($12).
Total Budgetary Resources:
Processing Assistance & Management: $3,525;
Tax Law Enforcement: $3,420;
Information Services: $1,732;
Information Technology Investment Account and Other: $670;
Total: $9,347.
Status of Budgetary Resources:
Obligations incurred:
Processing Assistance & Management: $3,357;
Tax Law Enforcement: $3,330;
Information Services: $1,545;
Information Technology Investment Account and Other: $324;
Total: $8,556.
Unobligated balances ” available:
Processing Assistance & Management: $20;
Tax Law Enforcement: [Empty];
Information Services: $90;
Information Technology Investment Account and Other: $236;
Total: $346[A].
Unobligated balances unavailable:
Processing Assistance & Management: $148;
Tax Law Enforcement: $90;
Information Services: $97;
Information Technology Investment Account and Other: $110;
Total: $445.
Total Status of Budgetary Resources:
Processing Assistance & Management: $3,525;
Tax Law Enforcement: $3,420;
Information Services: $1,732;
Information Technology Investment Account and Other: $670;
Total: $9,347.
Outlays:
Obligations incurred:
Processing Assistance & Management: $3,357;
Tax Law Enforcement: $3,330;
Information Services: $1,545;
Information Technology Investment Account and Other: $324;
Total: $8,556.
Less: spending authority from offsetting collections and adjustments:
Processing Assistance & Management: ($49);
Tax Law Enforcement: ($74);
Information Services: ($50);
Information Technology Investment Account and Other: ($7);
Total: ($180).
Obligated balances, net ” beginning of period:
Processing Assistance & Management: $405;
Tax Law Enforcement: $236;
Information Services: $549;
Information Technology Investment Account and Other: $50;
Total: $1,240.
Less: obligated balances, net ” end of period:
Processing Assistance & Management: ($395);
Tax Law Enforcement: ($287);
Information Services: ($395);
Information Technology Investment Account and Other: ($155);
Total: ($1,232).
Total Outlays:
Processing Assistance & Management: $3,318;
Tax Law Enforcement: $3,205;
Information Services: $1,649;
Information Technology Investment Account and Other: $212;
Total: $8,384.
[A] The Information Technology Investments fund comprised $211 of the
unobligated available balance that could not be obligated as of
September 30, 2000 because an expenditure plan had not been approved
by Congress.
Child Tax Credit:;
The child tax credit was originally authorized by the Taxpayer Relief
Act of 1997 (Public Law 105-34). The child tax credit is a special
credit for taxpayers who work, whose earnings fall below the
established allowance ceiling, and who have a qualifying child. In
fiscal year 2001, the Service issued $972 million in child tax credit
refunds. An additional $19.6 billion of child tax credits were applied
to reduce taxpayer liability. In fiscal year 2000, the Service issued
$809 million in child tax credit refunds. An additional $19.2 billion
of child tax credits were applied to reduce taxpayer liability.
Tax Gap:
The tax gap is the aggregate amount of tax imposed by the tax laws for
any given tax year that is not paid voluntarily and timely, excluding
interest and penalties. Although there is a tax gap for each type of
tax, the Service does not have current information upon which to base
a reasonable estimate of their magnitude.
The collection gap is the cumulative amount of assessed taxes,
including penalties and interest, which the Service 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 Service's balance sheet. The tax gap and the
collection gap are related and overlapping concepts. The collection
gap includes all of the uncollectible taxes for a particular tax year
of the tax gap, and uncollectible taxes from prior years.
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 bar charts and pie graphs below present the latest available
information on income tax and on related income, deductions, and
credits for individuals by income level and for corporations by size
of assets. The information illustrates the tax burden borne by
different income and asset brackets. The bar charts and pie graphs are
only representative of more detailed data and analysis available from
the Statistics of Income (SOI) 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.
(All figures are estimates based on samples provided by the Statistics
of Income office); (K = Thousands); (M = Millions):
Corporation Income Tax Returns (Tax Year 1999 Data):
Figure: Tax Burden % of Gross Income:
[Refer to PDF for image: vertical bar graph]
Size of Adjusted Gross Income: under $30K: 6%;
Size of Adjusted Gross Income: $30K to under $75K: 11%;
Size of Adjusted Gross Income: $75K to under $150K: 15%;
Size of Adjusted Gross Income: greater than $150K: 25%.
[End of figure]
Figure: Average Tax Per Return:
[Refer to PDF for image: vertical bar graph]
Size of Adjusted Gross Income: under $30K: $795;
Size of Adjusted Gross Income: $30K to under $75K: $5,318;
Size of Adjusted Gross Income: $75K to under $150K: $15,354;
Size of Adjusted Gross Income: greater than $150K: $106,186.
[End of figure]
Figure: Percent of Total Deductions on Taxable Income:
[Refer to PDF for image: pie-chart]
Under $30K: 32%;
$30K to under $75K: 32%;
$75K to under $150K: 19%;
Greater than $150K: 17%.
[End of figure]
Figure: Percent of Total Credits Against Tax Liability:
[Refer to PDF for image: pie-chart]
Under $30K: 23%;
$30K to under $75K: 44%;
$75K to under $150K: 16%;
Greater than $150K: 17%.
[End of figure]
Corporation Income Tax Returns (Tax Year 1998 Data):
Figure: Tax Burden % of Gross Income:
[Refer to PDF for image: vertical bar graph]
Size of Adjusted Gross Income: under $10M;
Percent of gross tax receipts: 6%;
Size of Adjusted Gross Income: $10M to under $50M;
Percent of gross tax receipts: 11%;
Size of Adjusted Gross Income: $50M to under $250M;
Percent of gross tax receipts: 15%;
Size of Adjusted Gross Income: greater than $250M;
Percent of gross tax receipts: 25%.
[End of figure]
Figure: Average Tax Per Return:
[Refer to PDF for image: vertical bar graph]
Size of Total Assets: under $10M; Tax per return: $3,600.
Size of Adjusted Gross Income: $10M to under $50M;
Tax per return: $182,309.
Size of Adjusted Gross Income: $50M to under $250M;
Tax per return: $839,925.
Size of Adjusted Gross Income: greater than $205M;
Tax per return: $14,648,677.
[End of figure]
Figure: Percent of Total Deductions on Taxable Income:
[Refer to PDF for image: pie-chart]
Under $10M: 9%;
$10M to under $50M: 4%;
$50M to under $250M: 7%;
Greater than $150K: 80%.
[End of figure]
Figure: Percent of Total Credits Against Tax Liability:
[Refer to PDF for image: pie-chart]
Under $10M: 28%;
$10M to under $50M: 9%;
$50M to under $250M: 8%;
Greater than $250M: 55%.
[End of figure]
[End of Supplemental and Other Accompanying Information]
Appendix I: Material Weaknesses, Reportable Conditions, and Compliance
Issues:
Material Weaknesses:
During our audit of IRS's fiscal year 2001 financial statements, we
identified six material weaknesses in internal controls. These
material weaknesses have given rise to significant management
challenges that have (1) impaired management's ability to timely
prepare reliable financial statements and other financial information
such as interim financial reports, (2) made it significantly more
difficult for management to effectively manage the allocation of
limited resources among competing priorities, (3) reduced IRS's
effectiveness in enforcing the Internal Revenue Code, (4) resulted in
errors in taxpayer accounts, and (5) increased taxpayer burden. The
issues that we have identified and discuss in this report relate to
IRS's controls over (1) financial reporting, (2) management of unpaid
assessments, (3) federal tax revenue and refunds, (4) property and
equipment, (5) budgetary activity, and (6) computer security. We
reported on each of these issues last year.[Footnote 9] We highlight
these issues in the following sections. Less significant matters
involving IRS's system of internal controls and its operations will be
separately reported to IRS in a management letter.
Financial Reporting:
In fiscal year 2001, as in prior years, IRS did not have internal
controls over its financial reporting process adequate to enable it to
timely, routinely, and reliably generate and report the information
needed to prepare financial statements and manage operations on an
ongoing basis. During fiscal year 2001, IRS did not have (1) an
adequate general ledger system for financial reporting and management
purposes, (2) adequate internal controls over material balances
maintained in its general ledger system and recording of financial
transactions, (3) a cost accounting system capable of providing timely
and reliable cost information related to IRS's activities and
programs, and (4) the ability to separately report several of the
federal government's largest types of revenue collections. These
conditions also limited IRS's ability to prepare useful and reliable
interim financial statements. To compensate for these weaknesses, IRS
continued to depend on extensive, labor-intensive compensating
procedures to enable it to generate management information and report
reliable balances in its financial statements at year-end. Although
this approach culminated in financial statements that were fairly
stated as of September 30, 2001 and 2000, it cannot produce current
data needed to manage operations on an ongoing basis, such as
preparing reliable cost-benefit analysis to assist in making resource
allocation decisions.
As we reported in previous years,[Footnote 10] during fiscal year
2001, IRS's general ledger system (1) comprised two independent
general ledgers that are not integrated with each other nor with their
supporting records for material balances,[Footnote 11] and (2) was not
supported by adequate audit trails for federal tax revenue, federal
tax refunds, taxes receivable, property and equipment, or budgetary
activity. In addition, IRS's general ledger for its custodial
activities does not use the standard federal accounting classification
structure. Because of these deficiencies, IRS's general ledger system
does not conform to the U.S. Government Standard General Ledger (SGL)
as required by the Core Financial System Requirements of the Joint
Financial Management Improvement Program[Footnote 12] or the
requirements of FFMIA. In its Management Discussion and Analysis
(MD&A), IRS discusses its plans to implement a single, integrated
general ledger that will be fully compliant with FFMIA. However, it is
unclear when this will be accomplished, and thus when IRS will have a
functional general ledger that is fully compliant with FFMIA,
including being supported by detailed subsidiary records for its
administrative and custodial accounts.
Also, during fiscal year 2001, IRS did not have internal controls over
its general ledger system adequate to provide reasonable assurance
that its balances were current and accurate on an ongoing basis. IRS
did not record material transactions in its general ledger system
until months after they occurred. For example, IRS did not record its
imputed costs[Footnote 13] for fiscal year 2001 until year-end,
although such costs are readily estimable. In addition, IRS did not
always correct discrepancies it identified during interim periods. In
fiscal year 2001, IRS began comparing material related proprietary and
budgetary accounts to identify discrepancies. This is an important
control for ensuring the reliability of financial records. However, we
found that this control was not effective because IRS did not make
timely adjustments to its general ledger to correct the discrepancies
it identified. As a result of these problems, material account
balances in the general ledger systems remained unreliable at interim
periods. These problems also rendered IRS unable to rely on its
general ledger system to support its year-end financial statements
without extensive, time-consuming processes designed to compensate for
such deficiencies.
We also found that IRS continued to lack a cost accounting system (1)
capable of accurately and timely tracking and reporting the costs of
IRS's programs and projects to assist it in managing its costs and (2)
meeting the JFMIP Systems Requirements for Managerial Cost Accounting.
This condition also renders IRS unable to produce reliable cost-based
performance information. IRS officials have indicated that IRS's
records contain information necessary to enable them to determine the
cost of various activities, such as conducting investigations.
However, this information is widely distributed among a variety of
information systems, thereby making the accumulation of cost
information time-consuming, labor-intensive, and not readily available
as a tool to manage costs. For example:
* IRS uses the Project Cost Accounting System (PCAS) to capture costs
of information systems projects at the project level by recording
certain codes for time charges. However, IRS only required that PCAS
be used by employees working on information systems-related projects,
which accounted for about 18 percent of IRS's budgetary resources in
fiscal year 2001.
* IRS has a variety of workload management systems that staff in
different units use to track how their time is spent on specific
tasks. However, these systems are not integrated with IRS's general
ledger or each other to allow IRS to readily identify and accumulate
the total costs for time spent by all units involved in any specific
activity.
In addition, neither PCAS nor IRS's workload management systems are
designed to track certain material forms of non-personnel costs by
project and subproject, such as equipment depreciation, rent, and
utilities.
Without a cost accounting system to centrally accumulate, organize,
and timely report cost data in a format that meets management's
current needs, such information is not readily available for use by
managers to aid in routinely managing costs and in decision-making.
Instead, IRS often finds it necessary to conduct special research
efforts tailored to determine the cost of a specific task or project.
IRS currently has a cost accounting system under development that is
scheduled for implementation in October 2003.
IRS also continues to be unable to determine the specific amount of
revenue it actually collects for three of the federal government's
four largest revenue sources”Social Security, hospital insurance, and
individual income taxes. In addition, IRS continues to be unable to
determine, at the time payments are received, collections for the
Highway Trust Fund or other trust funds that receive excise tax
receipts. This is primarily because the accounting information needed
to validate the taxpayer's liability and record the payment to the
proper trust fund is provided on the tax return, which is received
months after the payment is submitted. Further, the information on the
tax return pertains only to the amount of the tax liability, not to
the distribution of the amount previously collected. IRS does not
require taxpayers to submit information identifying the type of tax at
the time of payment because it believes that imposing such a
requirement would create an additional burden to taxpayers. In
addition, IRS's systems cannot presently capture and report such
information routinely. IRS is working on systems improvements to
accommodate this type of information in the future, and plans to
initiate a study in the next 2 to 3 years to gauge taxpayer ability
and readiness to provide such information at the time of payment
without imposing an additional burden on taxpayers. Until IRS has the
systems capability to record, and makes a decision with respect to
whether taxpayers should provide this information, it will continue to
be unable to timely report the specific amount of revenue it actually
collected for these large revenue sources. This condition also makes
the federal government rely on a complex, error prone, multi-step
process to distribute excise taxes to the recipient trust funds.
As a result of these pervasive financial reporting weaknesses, IRS was
unable to timely prepare reliable financial statements or other
financial information that Congress and senior IRS management could
rely on to oversee and assist in managing operations during fiscal
year 2001. Consequently, IRS was compelled to make certain business
decisions affecting the disposition of tens of billions of dollars
without current and reliable underlying financial information. For
example, for each of the following taxpayer compliance issues, IRS
indicated that resource limitations affected its ability to perform
necessary follow-up but could not readily determine or justify whether
it would be cost-beneficial to devote additional resources for such
follow-up:
* From 1996 to 1999, IRS only followed-up on 21 percent of the over 53
million underreported individual income tax cases it identified, which
accounted for about 41 percent of the over $65 billion in
underreported taxes IRS estimated on these cases.
* As of September 30, 2001, IRS had either not started collection
action or had stopped collection action in progress on unpaid tax
assessment cases with outstanding balances totaling about $12 billion
because it did not believe it had the resources to actively seek
collection.
* IRS follows-up on only a portion of the suspicious Earned Income Tax
Credit (EITC) claims it identifies, although the EITC has historically
been subject to high rates of invalid claims. The amount of improper
payments included in the almost $26 billion IRS disbursed for EITC in
fiscal year 2001 is unknown.
In deciding on the amount of resources to devote to follow-up on these
cases, IRS should consider factors such as the effects on fairness to
taxpayers and efforts to deter filing fraud. The relative costs and
benefits involved in following up on questionable cases should also be
an integral part of such decisions. However, in each of these
circumstances, IRS was not able to readily determine (1) the cost of
following up on cases or (2) how much it collected on those cases for
which it did follow-up. Without this information, IRS cannot perform
cost-benefit analysis to assist it in determining or justifying
whether the amount of resources it has devoted to each of these
programs is appropriate relative to costs and potential benefits
involved.[Footnote 14] Consequently, IRS is hindered in its ability to
justify its resource utilization decisions or provide justification
for resource increases, which could result in billions of dollars of
revenue going uncollected, lead to further erosion in taxpayers'
confidence in the equity of the tax system, and adversely affect
future compliance.
Management of Unpaid Tax Assessments:
During fiscal year 2001, we continued to find serious internal control
issues that affected IRS's management of unpaid assessments.
Specifically, we found (1) IRS continued to lack a subsidiary ledger
for unpaid assessments that would allow it to produce timely and
useful information with which to manage and report externally, and (2)
errors and delays in recording taxpayer information, payments, and
other activities that continued to hinder IRS's ability to effectively
manage its unpaid assessments.[Footnote 15]
IRS's management of unpaid assessments is hindered by a lack of
effective supporting systems. IRS lacks a detailed listing, or
subsidiary ledger, that tracks and accumulates unpaid assessments and
their status on an ongoing basis. As a result, IRS must rely on a
costly, manual, labor-intensive compensating process for external
reporting. Specifically, to report balances for taxes receivable and
other unpaid assessments in its financial statements and supplemental
information, IRS must apply statistical sampling and projection
techniques to data in its master files[Footnote 16] to estimate the
balances at year-end. This process takes months to complete, requires
adjustments totaling tens of billions of dollars, and produces amounts
that are only reliable as of the last day of the fiscal year.
Consequently, this information is not useful for ongoing management
decisions. In addition, the lack of a subsidiary ledger renders IRS
unable to timely develop reliable financial and management reports and
promptly identify and focus collection efforts on accounts most likely
to prove collectible.
IRS's management of unpaid assessments also continued to be hindered
by inaccurate tax records. We continued to find errors and omissions
in taxpayer records resulting from IRS's failure to accurately and
timely record information. As in prior years, the most prevalent
errors we found involved IRS's failure to record payments to all
related taxpayers associated with unpaid payroll taxes.[Footnote 17]
IRS's current systems cannot automatically link each of the multiple
assessments made for the one tax liability. Consequently, if the
business or an officer pays some or all of the outstanding taxes,
IRS's systems are unable to automatically reflect the payment as a
reduction in the related account or accounts. In reviewing 67 unpaid
payroll tax cases where one or more individuals were assessed a trust
fund recovery penalty, we found 20 cases in which payments were not
recorded in all related taxpayer accounts. Based on the results of our
work, we estimate that 37 percent of unpaid payroll tax cases
involving trust fund recovery penalties include payments that were not
accurately recorded to reflect each responsible party's reduction in
tax liability.[Footnote 18] IRS has attempted to compensate for the
lack of an automated link between related accounts by manually
inputting a code in each account that cross-references it to other
related accounts. However, of the 20 cases with unrecorded payments,
14 (70 percent) had all the necessary cross-references, and in 12 of
these cases, the payments were made after the cross-references had
been added to the accounts.
We found other errors in taxpayer accounts, which IRS took a
significant amount of time to correct. For example, in one case we
reviewed, a business filed a return reflecting a tax liability of
about $1.9 million. However, IRS erroneously recorded a tax debt of
over $34 million for the business. It took IRS over a year to correct
the records. In the interim, IRS withheld $600,000 that it should have
refunded to the business. Delays and errors in recording activity in
taxpayer accounts complicate IRS's efforts to derive a reliable
balance for unpaid assessments for its financial statements.
Additionally, failure to record payments and other activity timely
could result in taxpayer burden, including having enforcement actions
taken against them for taxes they do not owe or which have already
been paid.
We have reported on these issues in previous audits.[Footnote 19] IRS
has acknowledged the seriousness of these issues and continues to take
remedial steps to address their impact. The ultimate solution to many
of these issues is the successful modernization of IRS's systems,
which IRS acknowledges will take several years to complete.
Tax Revenue and Refunds:
During fiscal year 2001, we found that IRS's controls were not fully
effective in maximizing the government's ability to collect what is
owed and in minimizing the risk of payment of improper refunds. IRS
recognized this in its fiscal year 2001 FIA assurance statement to the
Treasury, in which it reported a material weakness in EITC and other
filing fraud. IRS's taxpayer compliance programs identify billions of
dollars of potentially underreported taxes and invalid EITC each year.
However, due in large part to perceived resource constraints, IRS
selects only a portion of the questionable cases it identifies for
follow-up investigation and action. In addition, IRS often does not
initiate follow-up on the cases it selects until months after the
related tax returns have been filed and any related refunds disbursed,
affecting its chances of collecting amounts due on these cases.
Consequently, the federal government is exposed to potentially
significant losses from reduced revenue and disbursements of improper
refunds. However, as discussed previously in the material weakness in
financial reporting, IRS's financial management systems do not
currently provide the timely, reliable information management needs to
assess whether the levels of resources it expends on these activities
are commensurate with the costs to be incurred and the benefits that
could be realized from such efforts.
The options available to IRS in its efforts to identify and pursue the
correct amount of taxes owed and to ensure that only valid refunds are
disbursed are currently limited. For example, third-party information
such as form 1099s[Footnote 20] that can corroborate the amount of
income reported by taxpayers are not required to be filed until after
the start of the tax filing season.[Footnote 21] Consequently,
comparison of such information with tax return data is problematic
because IRS does not have time to prepare the third-party data for
matching prior to the receipt of individual tax returns. Additionally,
while it processes hundreds of millions of tax returns each filing
season, IRS must issue refunds within statutory time constraints or be
subject to interest charges.[Footnote 22]
Nonetheless, IRS does have some preventive controls that, if
effectively implemented, could help to reduce the risks associated
with not identifying underreported taxes owed or issuing improper
refunds. For example, IRS's Examination Branch is responsible for
performing examinations on tax returns with potentially invalid EITC
claims[Footnote 23] to determine the validity of the claim. When
performed before refunds are disbursed, these examinations are an
important control to prevent disbursement of improper refunds.
However, these examinations are often performed after any related
refunds are disbursed. Consequently, they are not an effective
preventive control overall. In September 2000, IRS estimated that of
about $30 billion in EITC claims filed by taxpayers in tax year 1997,
about $9.3 billion (31 percent) were invalid.[Footnote 24] Of this
amount, only $1.5 billion (16 percent) was either recovered or
expected to be recovered through compliance efforts. The dollar amount
of improper refunds disbursed related to these invalid EITCs is
unknown. However, based on the tax year 1997 refund rate, which was
about 78 percent, IRS may have disbursed about $7.3 billion in EITC-
related improper refunds in tax year 1997, of which about $6.1 billion
(84 percent) may never be recovered. The full magnitude of improper
refunds disbursed annually due to invalid EITCs is unknown. IRS is
currently in the final year of a 5-year initiative started in fiscal
year 1998 to address noncompliance problems with EITCs.
Due to time and other constraints, IRS relies extensively on detective
controls, such as automated matching of returns with third-party data
such as W-2s (wage and tax statements) to identify for collection
underreported taxes and improper refunds. However, these programs are
not run until months after the returns have been filed. As a result,
they are used too late to prevent improper refunds from being
disbursed. In addition, although IRS's matching program for individual
tax returns identifies billions of dollars of potentially
underreported taxes each year, IRS only follows up on a portion of
these cases to determine how much tax is actually due and to pursue
collection of those amounts. For example, for tax year 1999,[Footnote
25] IRS's matching program for individuals identified 14.2 million
individual tax returns with potential underreported taxes totaling
$16.2 billion. IRS investigated 2.9 million (20 percent) of these
returns accounting for about $7.1 billion (44 percent) of the total
potential underreported taxes. There are factors that affect IRS's
ability to accelerate the timing of its automated matches, such as the
limitations of its current automated systems and the timing of filing
requirements for preparers of third-party documents, which are beyond
IRS's control. However, the results of IRS's efforts to follow up on
findings of its automated matches suggests that a substantial amount
of additional revenue might be realized if additional resources were
devoted to these efforts.
IRS's decisions to forgo follow-up examinations on invalid EITC claims
and potentially underreported taxes were based in part on perceived
resource constraints. However, as discussed previously, IRS's
financial management systems do not currently provide the timely,
reliable information management needs to perform cost-benefit analyses
to assist in determining the appropriate level of resources to devote
to these compliance programs. As a result of these problems, billions
of dollars of underreported taxes could remain uncollected and
improper refunds could be disbursed. This, in turn, could further
erode taxpayer confidence in the equity of the tax system and reduce
compliance with the tax laws.
Property and Equipment:
In fiscal year 2000, we reported that material weaknesses in IRS's
property and equipment (P&E) systems and controls prevented it from
having (1) P&E information available on an ongoing basis, and (2)
reasonable assurance that its assets were properly safeguarded and
used only in accordance with management policy.[Footnote 26] During
fiscal year 2001, IRS continued efforts to correct these longstanding
deficiencies in systems and controls over its P&E. Specifically, IRS
(1) implemented a new inventory record system for its automated data
processing assets, and (2) developed policies and procedures to
identify and record costs incurred to develop internal use software.
However, fundamental deficiencies in IRS's financial management system
continued to exist, which precluded it from having ongoing information
on its balance of P&E. To compensate for this, IRS relied on
compensating procedures to extract the cost of P&E acquisitions from
its accounting records. This approach enabled IRS to report a reliable
balance for P&E on its financial statements at September 30, 2001, but
it did not (1) enable IRS to produce the current, reliable information
it needs to manage P&E on an ongoing basis, or (2) provide assurance
that assets are properly safeguarded and used only in accordance with
IRS policy. IRS has reported a material weakness in its controls over
P&E in its annual assurance statement to Treasury required under 31
U.S.C. §3512 (c), (d) (FIA) every year since 1983.
As we previously reported, IRS does not have an integrated property
management system that appropriately records P&E additions and
disposals as they occur and links costs on the accounting records to
property records. Additionally, during fiscal year 2001, IRS continued
to lack procedures to record P&E assets and the corresponding
liabilities in its accounting system as transactions occur. Instead,
IRS expenses property purchases throughout the year, then records
adjustments after year-end to remove property acquisition costs from
its expense account and capitalize them as P&E based on analyses of
expense records. Consequently, IRS does not have reliable P&E data
available on an ongoing basis to make operational decisions related to
the acquisition and use of P&E. IRS hired a contractor to extract,
analyze and compile the data needed to report a reliable P&E balance
in its financial statements after fiscal year-end. However, this
process takes several months to complete. For example, P&E information
for the fiscal year ending September 30, 2001, was not available for
our review until December 2001.
Accurate records are essential for maintaining control over P&E to
ensure that assets are properly accounted for and safeguarded. In an
effort to improve accountability over its P&E in fiscal year 2001, IRS
implemented a new inventory record system for its automated data
processing P&E and established units with specific responsibility for
maintaining the accuracy of its inventory records. However, this new
inventory record system did not capture information essential to
ensure that software and software licenses were properly controlled
and used only in accordance with license agreements. Additionally,
while we noted improvement in the accuracy of IRS's inventory records
during fiscal year 2001, we nonetheless continued to find that IRS's
procedures for recording P&E acquisitions, disposals and transfers did
not ensure that transactions were promptly and accurately recorded.
Specifically, we found that 25 of 210 P&E items we tested at 21 sites,
including computers, monitors, and printers, could not be located at
the time of our review.[Footnote 27 At one site, 5 of 10 sample items
we selected from the inventory records could not be located. Based on
our work, we estimate that 12 percent of the items in IRS's P&E
inventory records were erroneously included as assets.[Footnote 28] As
a result, IRS's P&E records were not adequate to maintain
accountability over its property.
These longstanding weaknesses in IRS's property and accounting systems
continue to affect IRS's ability to account for its property and
report a reliable P&E balance on an ongoing basis. These weaknesses
will continue to exist until IRS has an integrated accounting and
property management system. IRS plans to acquire and install a fixed
asset module to the integrated financial system that will include
recording P&E as assets when purchased and generating detailed records
for P&E that reconcile to the financial records. IRS currently plans
to have the fixed asset module installed by March 2005.
Budgetary Activity:
We previously reported that internal control deficiencies over
appropriated funds prevented IRS from ensuring that its budgetary
authority[Footnote 29] was routinely accounted for, reported, and
controlled.[Footnote 30] In fiscal year 2001, IRS developed
compensating procedures to address several of the budgetary control
weaknesses we previously reported. Specifically, IRS (1) developed
procedures to identify and eliminate from the applicable general
ledger accounts transactions that were incorrectly recorded as
adjustments to prior years' obligations[Footnote 31] and (2) revised
its accrual methodology to address reported deficiencies in controls
over the accurate recording of undelivered orders[Footnote 32] and
accrued expenses. However, IRS did not apply its compensating
procedures throughout the fiscal year. Additionally, we continued to
find instances in which IRS did not timely record obligations. As a
result, IRS's internal controls did not ensure that its budgetary
resources were routinely accounted for, reported, and controlled.
Without adequate budgetary controls, IRS cannot ensure the reliability
of key budgetary information it needs on an ongoing basis to manage
its operations and ensure that its obligations do not exceed budgetary
authority.
During fiscal year 2001, we found that IRS continued to record certain
activities as adjustments to prior years' obligations that were not
valid adjustments to those obligations. This occurred because IRS's
accounting system records all adjustments that affect a prior year's
appropriation, including those that did not affect the obligated
amount, as adjustments to prior years' obligations. To identify the
valid fiscal year 2001 adjustments to prior years' obligations, IRS
manually analyzed the adjustment activity recorded in its accounting
system. IRS then used the results of this analysis to record adjusting
entries to the applicable general ledger accounts at the end of the
fiscal year. Of the $1.4 billion in adjustments to prior years'
obligated balances IRS recorded in its accounting system in fiscal
year 2001, nearly $1.1 billion were not valid. Although IRS made
adjusting entries to prevent its financial statements from being
misstated, its records of adjustments and obligated balances were
misstated throughout the fiscal year. Recording all adjustments that
affect a prior year's appropriation as adjustments to prior years'
obligations adversely affects IRS's ability to routinely report
accurate and reliable information on total budgetary resources and
obligations. IRS reports adjustments to prior years' obligations as
part of its SF133 Report on Budget Execution and Budgetary Resources,
submitted quarterly to OMB.[Footnote 33] Because the adjustment
accounts were misstated during the year, interim data IRS reported to
OMB on its budgetary activities were not accurate.
In prior audits, we found instances in which IRS received goods and
services during one fiscal year but did not record the applicable
expenditure to reduce the undelivered orders balance in its accounting
system until the following fiscal year. This resulted in IRS
overstating its balance of undelivered orders and understating its
accrued expenses. During fiscal year 2001, IRS developed a methodology
to more reasonably accrue expenditures at year-end and thus recognize
the associated reduction in the balance of undelivered orders.
Application of this methodology resulted in IRS being able to report
reliable amounts for fiscal year-end undelivered orders and accrued
expenses on its financial statements. However, IRS's balance of
undelivered orders was not accurate throughout fiscal year 2001 due to
delays in recording expenditures. Specifically, in testing 115
undelivered orders, we identified 35 instances in which IRS took over
30 days from the date it accepted the goods or services to record the
applicable expenditure in its accounting system. Untimely recording of
expenditures affects IRS's ability to efficiently manage its budgetary
resources by delaying the identification of obligated funds that (1)
are insufficient to cover the expenditure or (2) can be deobligated
and made available for future or existing obligations.
We also found that IRS continued to experience delays in recording
obligations in its accounting system during fiscal year 2001. In
testing 115 undelivered orders, we found 9 instances where IRS took
over 30 days from the date the obligation document was established to
record the obligated amount in its accounting system, and 5 instances
in which IRS incurred costs prior to recording the obligation in its
accounting system. For example:
* In one instance, IRS established an obligation on June 7, 2001, for
data processing services totaling $400,000. However, IRS did not
record the obligation in its accounting system until September 7, 2001-
3 months after the obligation was established.
* In another instance, IRS received telecommunication services that
covered the period October 1, 2000, through December 31, 2000, at a
cost of $5.9 million. However, IRS did not generate the initial
obligating document to establish the obligation of funds until January
26, 2001, and recorded the obligation in its accounting system on
January 29, 2001”over 3 months after the services were initiated.
Delays in recording obligations affect the reliability of IRS's
financial records used to track the status of its budgetary resources
for day-to-day decision-making. Until the obligation of funds is
recorded, obligations reflected in IRS's accounting system would be
understated. This could lead IRS management to believe that the agency
has more funding than is actually available. Consequently, IRS
management and personnel might enter into additional obligations in
excess of the budgetary authority made available by Congress.
Computer Security:
IRS relies extensively on computer information systems to perform
basic functions, such as processing tax returns and payments,
maintaining sensitive taxpayer data, calculating interest and
penalties, and generating refunds. Although IRS has corrected or
mitigated many of the computer security weaknesses identified in our
previous reports, much remains to be done to resolve the significant
control weaknesses that continue to exist within IRS's computing
environment and to be able to promptly address new security threats
and risks as they emerge. Such weaknesses can impair the agency's
ability to perform vital functions, and can increase the risk of
unauthorized disclosure, modification, or destruction of taxpayer data.
IRS has continued to make progress improving computer security
controls. For example, IRS has strengthened certain controls over its
mainframe systems, updated security standards for its Windows NT and
Unix computing environments, upgraded the operating system for its
workstations, installed security upgrades over its electronic tax
filing systems,[Footnote 34] and improved certain physical security
controls at its data processing facilities. IRS is also consolidating
several of its geographically dispersed Unix computer systems and
centralizing responsibility for their operation and management,
performing periodic internal control reviews of its computer-
processing environments, and implementing an intrusion detection
capability.
However, IRS continued to have serious weaknesses in fiscal year 2001
with computer controls designed to protect computing resources such as
networks, computer equipment, software programs, data, and facilities
from unauthorized use, modification, loss, and disclosure. For
example, IRS did not always effectively configure and implement
computer systems in accordance with its own computer security
guidelines, monitor system configuration and implementation, and
provide sufficient technical security-related training to key
personnel. In addition, IRS has not taken sufficient steps to ensure
that internal control deficiencies are considered and addressed at
other facilities. IRS did not always:
* adequately restrict electronic access to or within its computer
networks and systems;
* appropriately segregate system administration and security
administration responsibilities;
* optimally configure system software to ensure the security and
integrity of system programs, files, and data;
* sufficiently plan or test the activities required to restore certain
critical business systems when unexpected events occur;
* effectively monitor key networks and systems to identify
unauthorized activities and inappropriate system configurations; and;
* adequately ensure that access to key computer applications was
limited to authorized persons for authorized purposes.
Collectively, these problems indicate material weaknesses in IRS's
internal controls over information systems and data. These weaknesses
decreased the reliability and increased the vulnerability of data
processed by the systems. Until IRS can adequately mitigate these
weaknesses, unauthorized individuals could gain access to critical
hardware and software, and intentionally or inadvertently add, alter,
or delete sensitive data or computer programs. Such individuals could
also obtain personal taxpayer information and use it to commit
financial crimes in the taxpayers' names (identity fraud), such as
establishing credit and incurring debt. Reportable Conditions:
In addition to the material weaknesses discussed above, we identified
one reportable condition. This concerns weaknesses in IRS's internal
controls over manually processed tax receipts and taxpayer information
that we have reported in prior years.[Footnote 35] The reportable
condition related to revenue reporting and distribution that we
reported in prior years continues to exist, but is now included as
part of the material weakness in financial reporting.
Manual Tax Receipts and Taxpayer Information:
During fiscal year 2001, IRS's controls over cash, checks, and related
hard-copy taxpayer data it receives from taxpayers continued to be
inadequate to sufficiently limit the risk of theft, loss, or misuse of
such funds and data. Recognizing its responsibility to protect
taxpayer information and receipts, IRS has taken action in the past
several years to address a number of its control deficiencies. For
example, IRS began conducting periodic security reviews of receipt
processing areas, implemented many of its new hiring and courier
standards, and updated policies and procedures to improve the
safeguarding of taxpayer receipts and data. Nonetheless, IRS's actions
did not adequately address its control deficiencies primarily due to
inconsistencies in the establishment, implementation, and compliance
with these policies at IRS service center campuses, field offices, and
commercial lockbox banks that process tax receipts on behalf of IRS.
We previously reported that IRS was hiring individuals and allowing
them access to cash, checks, and other taxpayer data before it
received satisfactory results of their fingerprint checks.[Footnote
36] Specifically, we noted that of approximately 19,600 employees
hired during fiscal year 2000, about 4,900 (25 percent) were hired and
began working prior to IRS's receipt and evaluation of their
fingerprint checks. In response, IRS issued a final policy in August
2000 prohibiting new hires from entering on duty in any IRS office
until fingerprint checks were completed and case dispositions
evaluated. IRS has made significant progress on this issue during
fiscal year 2001. Nevertheless, based on our review of IRS and Office
of Personnel Management (OPM)[Footnote 37] data, we found that 104 of
the over 20,000 individuals IRS hired in fiscal year 2001 began
working at IRS facilities before IRS received and evaluated the
results of their fingerprint checks. Of these 104 employees, 53 (51
percent) were not fingerprinted until the day they entered on duty or
later, including 15 employees who were not fingerprinted until 1 to 3
months after they entered on duty. In addition, for 24 other
employees, neither IRS nor OPM had a record of fingerprint checks
being completed.
IRS has demonstrated a concerted effort to address courier security
weaknesses by adopting more stringent security standards for couriers
that transport IRS's daily deposits to depository institutions.
Specifically, IRS's courier policy requires that (1) courier services
use two bonded or insured couriers, (2) courier service employees with
IRS access pass a limited background investigation, and (3) the
courier company be insured for $1 million. However, IRS did not have
effective controls in place to ensure that the new requirements were
enforced. At the two IRS service center campuses we visited, we found
that local management did not obtain evidence to ensure that the
courier services they entrusted with the daily deposits met the
insurance coverage requirements, nor did they ensure that couriers, at
a minimum, had completed fingerprint checks before they began
transporting deposits for IRS.
We also found other weaknesses and inconsistencies in controls over
taxpayer receipts and taxpayer data at service center campuses and
field offices that have not yet been adequately addressed. For
example, we continued to find discovered remittances[Footnote 38] and
other receipts stored in open, unlocked containers, contrary to IRS
policy. Another IRS policy limits personal belongings that each worker
can bring into receipt processing areas to small items that could fit
into a clear, plastic bag, and specifically prohibits large items such
as purses and backpacks. However, one service center campus we visited
interpreted this policy to allow employees to bring in purses and
backpacks as long as they were made of clear plastic. As a result, at
this site we observed employees using large, clear plastic backpacks
and tote bags to carry multiple personal belongings such as lunch
bags, makeup bags, and items of clothing into receipt processing
areas. Although the backpacks and other carrying bags were
transparent, they contained so many items that it would be easy for an
employee to use them to conceal and remove checks from the receipt
processing area. In contrast, employees at another service center
campus that followed the national policy were only allowed to bring
into the receipt processing area small items that fit into one clear
quart-sized plastic bag.
These inconsistencies are further illustrated by control weaknesses
found at commercial lockbox banks that process tax receipts on behalf
of IRS. These lockbox banks operate under contract with Treasury's
Financial Management Service (FMS), and many of IRS's policies have
not been required of the lockbox banks. For example, the contract
requirements[Footnote 39] between FMS and the lockbox banks in place
throughout calendar year 2001 did not prohibit the banks from hiring
new employees before the results of fingerprint checks were received
and reviewed. Consequently, at the two lockbox banks we visited, we
found that fingerprint checks were not always performed or required
for either permanent or temporary employees. Similarly, IRS's courier
policy requirements that apply to IRS locations have not been required
of the lockbox banks. IRS officials told us the lockbox contract
requirements effective for calendar year 2002 would contain hiring and
courier requirements consistent with IRS requirements. However, we
found the requirements did not prohibit permanent lockbox employees
from starting work before their fingerprint check results were
received by lockbox management as required of all IRS employees, nor
did they require lockbox courier service employees to pass a limited
background investigation as required of couriers used by IRS service
center campuses.
These weaknesses increase IRS's vulnerability to theft or loss and
expose taxpayers to increased risk of losses from financial crimes
committed by individuals who inappropriately gain access to
confidential information entrusted to IRS. Thus, it is important that
IRS effectively address these matters because they are critical to IRS
successfully meeting its customer service goals.
Compliance Issues:
Our tests of compliance with selected provisions of laws and
regulations disclosed one instance of noncompliance that is reportable
under U.S. generally accepted government auditing standards and OMB
guidance. This relates to IRS's timing of 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 FFMIA.
In previous audits, we reported that IRS was not in compliance with
Section 6159 of the Internal Revenue Code, which requires that the
terms of installment agreements IRS enters into with taxpayers with
outstanding tax liabilities provide for full satisfaction of the
outstanding tax liability, including future interest accruals. In our
testing of installment agreements IRS entered into with taxpayers
during fiscal year 2001, we did not identify any instances of material
noncompliance with this statute.[Footnote 40]
IRS Did Not Always Release Federal Tax Liens in Accordance with the
Internal Revenue Code:
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. The lien serves to protect the
interest of the federal government and serves as a public notice to
current and potential creditors of the government's interest in the
taxpayer's property. For example, federal tax liens are disclosed in
credit reports of individuals. Under section 6325 of the Internal
Revenue Code, IRS is required to release a federal tax lien within 30
days after the date the tax liability is satisfied or has become
legally unenforceable or the Secretary of the Treasury has accepted a
bond for the assessed tax.
In previous 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.[Footnote 41] We found that this
condition continued to exist during fiscal year 2001. Specifically, in
our testing of 59 tax cases with liens in which the taxpayers' total
outstanding tax liabilities were either paid off or abated during
fiscal year 2001, we found 5 instances in which IRS did not release
the applicable federal tax lien within the 30-day statutory
requirement. The time between satisfaction of the liability and
release of the lien ranged from about 146 to over 300 days. In one
case, we found that although the taxpayer had paid off the outstanding
tax liability by December 2000, IRS did not formally release the lien
against the taxpayer's property until October of the following year-
302 days later. Based on the results of our work, we estimate that for
over 8 percent of unpaid tax assessment cases where IRS had filed a
tax lien that were resolved in fiscal year 2001, IRS did not release
the lien within the 30-day requirement.[Footnote 42] The failure to
promptly release tax liens could cause undue hardship and burden to
taxpayers who are attempting to sell property or apply for commercial
credit.
IRS's Financial Management Systems Are Not in Compliance with FFMIA
Requirements:
In fiscal year 2001, we continued to find that IRS's financial
management systems did not substantially comply with the requirements
of FFMIA. Specifically, IRS's systems did not comply with Federal
Financial Management Systems Requirements (FFMSR), federal accounting
standards (U.S. generally accepted accounting principles), and the
U.S. Government Standard General Ledger (SGL) at the transaction
level. We found that IRS (1) cannot rely on information from its
general ledger to prepare its financial statements, (2) does not have
a general ledger that conforms to the SGL, (3) lacks a subsidiary
ledger for its unpaid assessments, (4) lacks a reliable subsidiary
ledger for its P&E, and (5) lacks an effective audit trail from its
general ledger back to subsidiary detailed records and transaction
source documents for material balances. Other material weaknesses we
discussed earlier”controls over management of unpaid assessments,
federal tax revenue and refunds, P&E, budget, and computer security”
are also conditions indicating that IRS's systems do not comply with
FFMIA.
As a result, IRS's financial management systems cannot produce
auditable financial statements and related disclosures that conform
with U.S. generally accepted accounting principles without substantial
compensating processes and significant adjustments. These weaknesses
also indicate that IRS's systems cannot routinely accumulate and
report the full cost of its activities. Since IRS's systems do not
comply with FFMSR, U.S. generally accepted accounting principles, and
the SGL, they also do not comply with OMB Circular A-127, Financial
Management Systems. In its FIA assurance statement to Treasury, IRS
reported that its financial management systems did not substantially
comply with FFMIA in fiscal year 2001.
IRS has established a remediation plan to address the conditions
affecting its systems' ability to comply with the requirements of
FFMIA. This plan outlines the actions to be taken to resolve these
issues, designates resources to be devoted to implementing those
actions, and specifies time frames for their completion. Due to the
long-term nature of IRS's systems modernization efforts, which IRS
expects will resolve many of the most serious issues, many of the
planned time frames exceed the 3-year resolution period specified in
FFMIA. However, for these instances IRS has received a waiver from
this requirement from OMB.
To fulfill our responsibilities as the auditor of IRS's financial
statements, we:
* Examined, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. This included testing
selected statistical samples of unpaid assessment, revenue, refund,
accounts payable, accrued expenses, payroll, nonpayroll, P&E, and
undelivered order transactions. These statistical samples were
selected primarily to substantiate balances and activities reported in
IRS's financial statements. Consequently, dollar errors or amounts can
and have been statistically projected to the population of
transactions from which they were selected. In testing these samples,
certain attributes were identified that indicated either significant
deficiencies in the design or operation of internal control or
compliance with provisions of laws and regulations. These attributes,
where applicable, can be and have been 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 internal controls related to financial
reporting (including safeguarding assets), compliance with laws and
regulations (including the execution of transactions in accordance
with budget authority), and performance measures reported in the
Management's Discussion and Analysis.
* Tested relevant internal controls over financial reporting
(including safeguarding assets) and compliance, and evaluated the
design and operating effectiveness of internal controls.
* Considered the process for evaluating and reporting on internal
controls and financial management systems under FIA.
* Tested compliance with selected provisions of the following laws and
regulations: Anti-Deficiency Act, as amended (31 U.S.C. §1341(a)(1)
and 31 U.S.C. § 1517(a); Agreements for payment of tax liability in
installments (26 U.S.C. §6159); Purpose Statute (31 U.S.C. §1301);
Release of lien or discharge of property (26 U.S.C. §6325); Interest
on underpayment, nonpayment, or extensions of time for payment of tax
(26 U.S.C. §6601); Interest on overpayments (26 U.S.C. §6611);
Determination of rate of interest (26 U.S.C. §6621); Failure to file
tax return or to pay tax (26 U.S.C. §6651); Failure by individual to
pay estimated income tax (26 U.S.C. §6654); Failure by corporation to
pay estimated income tax (26 U.S.C. §6655); Prompt payment act (31
U.S.C. §3902); Fair Labor Standards Act of 1938, as amended (29 U.S.C.
§206); Civil Service Retirement Act of 1930, as amended (5 U.S.C.
§§5332, 5343); Federal Employees' Retirement System Act of 1986, as
amended (5 U.S.C. §8423); Social Security Act, as amended (26 U.S.C.
§3101 and 42 U.S.C. §430); Federal Employees Health Benefits Act of
1959, as amended (5 U.S.C. §§8905, 8906, and 8909); and Economic
Growth and Tax Relief Reconciliation Act of 2001 (26 U.S.C. §6428).
* Tested whether IRS's financial management systems substantially
comply with the three FFMIA requirements.
[End of section]
Appendix III: Comments from the Internal Revenue Service:
Department Of The Treasury:
Internal Revenue Service:
Deputy Commissioner:
Washington, D.C. 20224:
February 19, 2002:
Mr. David M. Walker:
Comptroller General
U.S. General Accounting Office: 441 G Street, NW:
Washington, DC 20548:
Dear Mr. Walker:
Thank you for the opportunity to review and comment on the draft of
your report titled, Financial Audit: IRS' Fiscal Years 2001 and 2000
Financial Statements. Maintaining the unqualified audit opinion for
the annual financial statement for the second year in a row is a
significant accomplishment. In this regard, we want to recognize the
GAO's dedication and cooperation during this audit. We are grateful
for the excellent advice and support your staff provided throughout
the process.
As you noted in your letter, the IRS' unqualified opinion on its
financial statements is the result of a strong commitment and hard
work by management and staff. We agree, and want to reiterate that
commitment. We strongly believe that it is essential for a tax agency
responsible for collecting over $2 trillion of tax revenue to be able
to properly reflect its financial condition.
Our commitment is demonstrated not only by the favorable opinion but
also by numerous improvements that we have undertaken. As you
reported, we have made notable progress in many areas and have begun
to lay the groundwork for sustainable improvements in several others.
Specifically, we:
* Implemented a disposal process for property and equipment;
* Implemented a process to ensure accruals were adequately reflected
as of year-end;
* Issued guidance and improved our review of and accounting for open
obligations;
* Collected and accumulated cost data from existing systems to provide
necessary information for decision making and cost management;
* Implemented continuity of operations efforts, such as enhanced
business systems preparedness and contingency capabilities for
potential biohazard threats, at each IRS campus;
* Established the Computer Security Incident Response Center, which
became operational in FY 2001;
* Required all personnel offices to report monthly all individuals who
entered on duty prior to a fingerprint result, effective October 2001.
The next two major milestones for strengthening our financial
operations are Secretary O'Neill's November 15, 2002 audited financial
statement goal and implementing our new Integrated Financial System.
While pursuing these goals, we are aggressively initiating additional
short-term actions that will further improve the timeliness and
accuracy of our financial information. Specifically, we plan to:
* Improve guidance to the field about proper classification of
property and equipment;
* Improve our accrual process in FY 2002 to address timely recording
of receipt of goods and services;
* Institutionalize periodic reviews of general ledger balances during
the year and post adjustments and correcting entries quarterly;
* Record imputed costs regularly;
* Provide guidance to the field about more accurately reporting
revenue activity.
While the vast majority of the report is on the mark, we are concerned
that a few of the conclusions reached by the GAO overstate our
shortcomings. For example, on page 16 of the report, the GAO states
the "IRS cannot ensure...that its resources do not exceed budget
authority." We clearly have this capability, given that the IRS
resources have never exceeded our budget authority. Having said that,
we agree with the GAO's findings in this area, but ask it to consider
modifying the specific conclusion. Please also reconsider the
conclusion drawn under "cost accounting," which is discussed later in
this memo. The draft report does not adequately address how we use
current cost information in our strategic planning process.
As another general comment, we are concerned that the GAO's references
to "workarounds" could be misleading and needs to be clarified. The
term "workarounds" could imply that we are bypassing or circumventing
proper accounting methods. In fact, we are implementing legitimate,
alternative solutions and compensating processes, many of which were
discussed with the GAO, to supplement our systems. We are asking that
this wording be changed throughout the report.
Additional comments about specific sections of the report are provided
as follows:
Page 6:
Timeliness:
The GAO states that the IRS was compelled to rely on monumental human
efforts "that extended nearly four months after the September 30, 2001
fiscal year-end to derive reliable year-end balances." While we agree
considerable effort was needed to produce the financial statements and
complete the audit work, the IRS actually delivered financial
statements to the GAO on December 14, 2001, two and one-half months
after the close of the year. Those statements contained reliable year-
end balances.
Page 16:
Financial Reporting:
The GAO cites that the Management Discussion and Analysis (MD&A)
indicates the IRS is scheduled to replace its current general ledger
system with a general ledger that is fully compliant with the
requirements of FFMIA by April 2005. The MD&A has been revised to
clearly state that Release II of the Integrated Financial System will
enable the phased integration of the administrative and revenue
general ledgers into a single U.S. Standard General Ledger compliant
general ledger. Additionally, under the current Enterprise Data
Warehouse Release Plan, subject to Information Technology Investment
Account funding availability, the revenue sub ledgers will be
completed in Release V, which will extend beyond April 2005.
The GAO also cites that the general ledgers are not supported by
adequate audit trails. In prior years, the IRS did not have an
obligation subsidiary ledger to support undelivered orders. However,
we have since developed a data warehouse for obligations that shows
the full transaction history for each obligation, including open
obligations and those that have been fully liquidated. The warehouse
contains all transactions in the acquisition cycle: obligation,
purchasing, receipt, and payment. The subsidiary is updated on a
nightly basis and is online for user queries through a web-based
interface. We believe this subsidiary satisfies the requirement of
providing an adequate audit trail for budgetary activity. Other
subsidiary ledgers, with appropriate audit trails, will be built
through our systems modernization efforts.
Pages 17 through 20:
Cost Accounting:
The GAO discusses at some length the IRS' inability to make good
business decisions on resources due to the lack of a single cost
accounting system. We agree we must have an integrated cost accounting
system. However, we believe the GAO has overstated the impact of not
having such a system. Existing systems are providing adequate cost
information for good decision-making. Granted, more work may be
necessary to accumulate the data, but it is available and is being
used. In FY 2000, the IRS established a strategic planning and
budgeting process that allows us to effectively use available cost
information to make sound resource allocation decisions. In fact, in
the FY 2003 budget, we have identified over $200 million in costs that
can be reallocated to top priority customer service and compliance
enhancements.
Page 22:
Management of Unpaid Tax Assessments:
The GAO cites continuing errors involving the IRS' failure to record
payment to all related taxpayer cases (e.g. Trust Fund Recovery
Penalty (TFRP)) associated with unpaid payroll taxes. The IRS
continues to make incremental improvements in the manual processes
while working toward automation. In August 2001, the IRS began to
assess these cases separately for each quarter, rather than combining
quarters to make one lump-sum assessment. This change should make the
cross-referencing process more accurate and easier to complete. As
reported in our FY 2000 audit response, we are continuing to develop
Phase II of the automation of the TFRP inventory based system that
will ensure the timely posting of payments and cross-referencing to
all applicable liabilities. A pilot of this phase is scheduled for
October 2003.
Page 24:
Tax Revenue and Refunds:
The GAO's report does not take into account the necessity of an
interview with the taxpayer in many cases to determine Earned Income
Tax Credit (EITC) eligibility. The IRS has implemented all legislative
authority to immediately correct erroneous EITC claims, either through
math error procedures or e-file rejects. For those EITC issues that
can only be corrected through deficiency procedures, the IRS has used
the special EITC appropriation to examine approximately 500,000 EITC
returns each year. Many of these returns are examined prior to the
issuance of any refund. Approximately $1 billion is protected or
collected through these efforts each year.
We also want to point out the IRS' efforts to prevent erroneous EITC
refunds from being issued. Specifically, prior to issuing an EITC
refund, the IRS: (1) uses the dependent database, a rule-based system
that matches tax return data to third party data and analyzes return
characteristics to identify questionable issues relating to the EITC
on all returns claiming the EITC; (2) runs all EITC claims through
Criminal Investigation's Electronic Fraud Detection System; (3)
requires recertification before a taxpayer can claim the EITC on the
current tax year if an improper EITC claim was filed in the previous
year; (4) bans taxpayers from claiming the EITC for either two or ten
years after the tax year when we determined the taxpayer's claim was
due, depending on whether there was intentional disregard of the rules
and regulations or fraud; and (5) automatically freezes subsequent
year refunds where there is already an open examination. In addition,
a taxpayer's eligibility for the EITC cannot be determined with
certainty by the IRS during the processing of the tax return. Many
potential errors can be identified and corrected only by using
deficiency procedures.
Page 30:
Computer Security:
Although the GAO agrees progress has been made to improve computer
security controls, the report indicates significant control weaknesses
continue to exist. The IRS continually focuses on its security and
privacy responsibilities and strives to enhance and effectively manage
its security program. The IRS is also committed to ensuring that
effective safeguards over taxpayer data, both electronic and hard
copy, are in place. To demonstrate this commitment, we established the
Security Executive Steering Committee to oversee and prioritize
improvements in the areas of computer security, physical security, and
controls over taxpayer receipts. This Committee includes business
operating division commissioners and chief officers.
The IRS also continues its efforts on the Technology Security
Committee to address improved controls over computer resources such as
system programs, files, and data. As noted in your report, this
Committee approved standards for the NT and UNIX processing
environments. In FY 2002, the Deputy Commissioner for Modernization &
Chief Information Officer has committed to ensuring consistent
management and implementation of the security controls over IRS'
networks and systems. In addition to our efforts already initiated to
ensure continuity of operations, we are:
* Developing guidance on defining electronic access to tax processing
systems;
* Continuing efforts to address the segregation of duties between
system and security administration, a requirement in our Law
Enforcement Manual;
* Improving the monitoring of key systems to identify unauthorized
activities and inappropriate system configuration.
Page 32:
Reportable Condition:
The GAO cites that there are continued weaknesses in the IRS' internal
controls over manually processed tax receipts and taxpayer
information. Through the IRS' Subcommittee on Security, we focused on
improvement in physical security at IRS campuses, field offices, and
commercial lockbox banks. The Subcommittee established enhanced
controls in the Receipt and Control areas and established routine
compliance checks at campuses and field offices. In 2002, the IRS will
ensure that enhanced procedures are revisited and employees working in
these functions receive additional awareness training. This will
include a restatement of our policy regarding the limits established
for personal belongings that each worker can bring into receipt
processing areas.
The Subcommittee also established improved security standards for
commercial lockbox banks in the new contract, which is currently in
place. Among other requirements, these standards require an FBI
fingerprint check be performed for each individual who will work in
the lockbox processing area. These individuals include temporary
agency employees, bank employees, and vendors.
Page 33:
Manual Tax Receipts and Taxpayer Information:
In its review of the IRS and Office of Personnel Management (OPM)
data, the GAO found that 128 of the over 21,000 individuals hired in
FY 2001 began working at IRS facilities prior to the receipt and
review of a fingerprint check.
Based on the results of additional inquiries made to IRS personnel
offices and OPM, our in-depth review and analysis of the data
disclosed that only 52 individuals began to work without a fingerprint
check. Of those, 13 were either separated immediately or sent home
until fingerprint results were received, thus mitigating any risk that
might have been created. In comparison, for FY 2000, the GAO reported
that 4,900, or 25 percent, of 19,600 hires entered on duty without a
fingerprint result. In FY 2001, those entering on duty without a
fingerprint result represented less than 1/4 of one percent of all
hires. This is overwhelming proof of the improvements the IRS has made
in this area and that taxpayer returns and sensitive data are not
placed at risk.
To further improve compliance with fingerprinting policy we plan to:
* Develop a database to provide personnel offices and applicants with
information regarding sources, other than IRS personnel offices, where
fingerprints can be taken;
* Conduct training for personnel involved in the fingerprinting and
background investigation process.
Page 36:
IRS Did Not Always Release Federal Tax Liens in Accordance with the
Internal Revenue Code:
The GAO says the IRS did not release liens within the 30-day
requirement. We reviewed the cases cited. Although we have not been
able to fully determine the "root" cause of delayed lien releases, the
majority of the cases have a freeze condition and/or credit transfer
which prevented the release of the lien. In response, we initiated a
program change to bypass certain freeze conditions so the master file
will notify the lien system at an earlier point in time of the
satisfaction of the liability. We will continue our research to
determine other ways to improve this process.
This completes our specific comments.
In closing, I believe the IRS has demonstrated its commitment to
improving financial management. We are taking, and will continue to
take, the appropriate and necessary actions to improve processes and
current systems while moving aggressively on our systems modernization
effort. Both the GAO and the IRS recognize that it is only through
implementation of the new integrated financial management system that
we will be able to overcome the majority of the material weaknesses
cited in your report.
Sincerely,
Signed by:
Bob Wenzel:
[End of section]
Footnotes:
[1] IRS significantly changed its cost classification structure during
fiscal year 2001 and was unable to restate fiscal year 2000 balances
for purposes of comparability. Consequently, IRS is not presenting a
comparative fiscal year 2000 statement of net cost. IRS received a
waiver from this reporting requirement from the Office of Management
and Budget.
[2] U.S. General Accounting Office, Financial Audit: Examination of
IRS' Fiscal Year 1992 Financial Statements, [hyperlink,
http://www.gao.gov/products/GAO/AIMD-93-2] (Washington, D.C.: June 30,
1993).
[3] U.S. General Accounting Office, High-Risk Series: An Update,
[hyperlink, http://www.gao.gov/products/GAO-01-263] (Washington, D.C.;
January 2001) and U.S. General Accounting Office, Major Management
Challenges and Program Risks: Department of the Treasury, [hyperlink,
http://www.gao.gov/products/GAO-01-254] (Washington, D.C.: January
2001).
[4] A material weakness is a condition that precludes the entity's
internal controls from providing reasonable assurance that material
misstatements in the financial statements would be prevented or
detected on a timely basis. Reportable conditions are matters coming
to our attention that, in our judgment, should be communicated because
they represent significant deficiencies in the design or operation of
internal controls that could adversely affect IRS's ability to meet
the objectives described in this report.
[5] [hyperlink, http://www.gao.gov/products/GA0-01-263].
[6] U.S. General Accounting Office, Financial Audit: IRS' Fiscal Year
2000 Financial Statements, [hyperlink, http://www.gao.gov/products/GAO-
01-394] (Washington, D.C.: March 1, 2001).
[7] [hyperlink, http://www.gao.gov/products/GA0-01-394].
[8] Based on the results of testing for a statistical sample of 59
installment agreements IRS entered into with taxpayers during fiscal
year 2001, we are 95 percent confident that the rate of occurrence of
installment agreements entered into during fiscal year 2001 whose
terms do not require full satisfaction of the tax liability did not
exceed 5 percent.
[9] [hyperlink, http://www.gao.gov/products/GAO-01-394].
[10] [hyperlink, http://www.gao.gov/products/GAO-01-394], and U.S.
General Accounting Office, Internal Revenue Service: Progress Made,
but Further Actions Needed to Improve Financial Management [hyperlink,
http://www.gao.gov/products/GAO-02-35], (Washington, D.C.: October 19,
2001).
[11] IRS's two independent general ledgers separately support its
administrative and custodial operations.
[12] The Joint Financial Management Improvement Program (JFMIP) is a
cooperative undertaking of the Office of Management and Budget, the
Department of the Treasury, the Office of Personnel Management, and
GAO working in cooperation with each other and with operating agencies
to improve financial management practices.
[13] Imputed costs are IRS costs that have been paid in part or in
full by other entities.
[14] A cost-benefit analysis would consider the costs and expected
benefits, both direct and indirect, in increasing resources to pursue
collections of outstanding taxes or recovery of improper refund
payments. These benefits could include not only increased collections
of outstanding taxes and recoveries of improper refund payments, but
also benefits to taxpayers through earlier IRS action that might
prevent a build up of the outstanding tax liabilities. Improved
compliance by taxpayers with the nation's tax laws could also be a
benefit.
[15] Unpaid assessments consist of (1) taxes due from taxpayers for
which IRS can support the existence of a receivable through taxpayer
agreement or a favorable court ruling (federal taxes receivable), (2)
compliance assessments where neither the taxpayer nor the court has
affirmed that the amounts are owed, and (3) write-offs, which
represent unpaid assessments for which IRS does not expect further
collections due to factors such as the taxpayer's death, bankruptcy,
or insolvency. Of these three classifications of unpaid assessments,
only federal taxes receivable are reported on the principal financial
statements. As of September 30, 2001, IRS reported $20 billion (net of
an allowance for doubtful accounts of $60 billion), $23 billion, and
$137 billion in these three categories, respectively.
[16] IRS's master file contains detailed records of taxpayer accounts.
However, the master files do not contain all the details necessary to
properly classify or estimate collectibility for unpaid assessment
accounts.
[17] When a company does not pay the taxes it withholds from
employees' wages, such as Social Security or individual income tax
withholdings, IRS has the authority to assess all responsible officers
individually for the taxes withheld from employees. Although assessed
to multiple parties, the liability need only be paid once. Thus, IRS
may record 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
business. The assessments made against business officers are known as
trust fund recovery penalties.
[18] We are 95 percent confident that the confidence interval around
this estimate ranges from 16 percent to 59 percent.
[19] [hyperlink, http://www.gao.gov/products/GA0-01-394].
[20] IRS 1099 forms are used by third parties, such as financial
institutions, to report taxpayers' interest income, dividend
distributions, and other miscellaneous income.
[21] The peak tax filing season primarily occurs from January 1 to
April 15 of each year.
[22] By statute, IRS must pay interest on refunds not paid within 45
days of receipt or due date, whichever is later (26 U.S.C. §6611).
[23] Because it is a tax credit, an EITC claim always results in a
reduction of the taxpayer's calculated tax liability. However,
depending on the taxpayer's amount of taxes withheld, it may or may
not result in a refund for a particular tax year.
[24] Internal Revenue Service, Compliance Estimates for Earned Income
Tax Credit Claimed on 1997 Returns (Washington, D.C.: September 2000).
IRS's study on tax year 1999 was still being completed at the time of
our audit.
[25] Individual tax returns are not due until April 15 of the
following year (up to October 15 if extensions are filed), and the
under-reporter screening programs cannot be run until after the
returns are filed. Consequently, tax year 1999 is the most recently
completed tax year for which the cited data are available.
[26] [hyperlink, http://www.gao.gov/products/GAO-01-394].
[27] For our floor-to-book sample, we obtained a representative
selection of P&E items with a two-stage cluster sample. In the first
stage, we selected a representative sample of 21 buildings. In the
second stage, we selected a representative sample of 10 assets located
at each of the 21 buildings from the asset records of the ADP and non-
ADP P&E inventory systems.
[28] We are 90 percent confident that the confidence interval around
this estimate ranges from 6 percent to 19 percent.
[29] Budget authority is the authority provided by law to enter into
financial obligations that will result in immediate or future outlays
involving federal government funds.
[30] [hyperlink, http://www.gao.gov/products/GAO-01-394] and
[hyperlink, http://www.gao.gov/products/GAO-02-35].
[31] An adjustment to a prior year's obligation is recorded when the
dollar amount previously recorded is affected by a subsequent event,
such as a change in the price of goods or services.
[32] Undelivered orders represent the value of goods and services that
have been ordered and obligated but have not been received.
[33] OMB requires that each agency submit an SF133 quarterly to report
its budget execution as well as the status of its budgetary resources.
[34] U.S. General Accounting Office, Information Security: IRS
Electronic Filing Systems, [hyperlink, http://www.gao.gov/products/GAO-
01-306] (Washington, D.C.: February 16, 2001).
[35] [hyperlink, http://www.gao.gov/products/GA0-01-394].
[36] [hyperlink, http://www.gao.gov/products/GA0-01-394] and
[hyperlink, http://www.gao.gov/products/GAO-02-35].
[37] OPM processes fingerprint requests and results for IRS.
[38] Discovered remittances are cash and/or checks that were
erroneously overlooked during the extraction process.
[39] The lockbox contracts specify general guidelines to be followed.
The more detailed requirements are laid out in the annual lockbox
processing guidelines, which all of the lockbox banks are required to
follow.
[40] This does not mean that all installment agreements IRS entered
into with taxpayers during fiscal year 2001 were structured to provide
for full satisfaction of the tax liability. In addition, installment
agreements IRS entered into with taxpayers in previous years may not
be so structured, as evidenced by our prior audits. Based on the
results of testing for a statistical sample of 59 installment
agreements IRS entered into with taxpayers during fiscal year 2001, we
are 95 percent confident that the rate of occurrence of installment
agreements entered into during fiscal year 2001 whose terms do not
require full satisfaction of the tax liability did not exceed 5
percent.
[41] [hyperlink, http://www.gao.gov/products/GA0-01-394].
[42] We are 95 percent confident that the confidence interval around
this estimate ranges from 3 percent to 19 percent.
[End of section]
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site: [hyperlink, http://www.gao.gov/fraudnet/fraudnet.htm]: E-mail:
fraudnet@gao.gov:
Automated answering system: (800) 424-5454 or (202) 512-7470:
Public Affairs:
Jeff Nelligan, managing director, NelliganJ@gao.gov: (202) 512-4800:
U.S. General Accounting Office: 441 G Street NW, Room 7149:
Washington, D.C. 20548:
