	IRS’ Financial Reporting Controls Are Inadequate and Its Financial Management Systems Do Not Comply With FFMIA

IRS does not have internal controls over its financial reporting process adequate to provide reasonable assurance that its principal financial statements are reliable. In an effort to overcome these deficiencies, IRS employs a costly, labor intensive, and time-consuming process involving extensive and complex analysis and ad hoc procedures to assist in preparing its principal financial statements. With respect to IRS’ administrative activities, this approach was unsuccessful in producing reliable balances. IRS (1) cannot reliably prepare four of the six principal financial statements required by the Office of Management and Budget, which prescribes the form and content of federal financial statements, (2) does not have a general ledger(s) that conforms to the SGL, (3) lacks a subsidiary ledger for its unpaid assessments, accounts payable, and undelivered orders, and (4) lacks an effective audit trail from its general ledgers back to subsidiary detailed records and transaction source documents. Although IRS has detective (post-refund) controls in place, the lack of sufficient preventive controls exposes the government to potentially significant losses due to inappropriate disbursements for refunds. According to IRS’ records, IRS investigators identified over $17 million in alleged fraudulent refunds that had been disbursed during the first 9 months of calendar year 1998 and prevented the disbursement of an additional $65 million in alleged fraudulent refund claims. Physical Security Over Manual Tax Receipts and Taxpayer Information Is Inadequate

As we have previously reported, IRS’ controls over cash, checks, and related hardcopy taxpayer data it manually receives from taxpayers are not adequate to reduce to an acceptably low level the risk that these payments will not be properly credited to taxpayer accounts and deposited in the Treasury or that proprietary taxpayer information will not be properly safeguarded. IRS Did Not Reconcile Its Fund Balance With Treasury

Throughout fiscal year 1998, IRS did not reconcile its administrative fund balance with Treasury accounts. Based on assets included in IRS’ property systems, we found that $1.2 billion, or 69 percent of IRS’ gross P&E, was not included as property and equipment in the financial statements because of the use of this threshold to capitalize P&E assets. Continued weaknesses in these areas can allow unauthorized individuals access to critical hardware and software where they may intentionally or inadvertently add, alter, or delete sensitive data or programs. Significant Efforts Will Be Needed to Resolve IRS’ Financial Management Issues

IRS continues to be plagued by serious internal control and systems deficiencies that hinder its ability to achieve lasting financial management improvements. Additionally, significant progress continues to be made on the serious computer security issues we have reported for several years. Components of IRS’ $222 Billion of Unpaid Assessments (Dollars in Billions)

Taxes Receivable - Collectible ($26)
Taxes Receivable - Uncollectible ($55)
Compliance Assessments ($22)
Write-offs ($119)
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Why GAO Did This Study

Pursuant to a congressional request, GAO discussed the results of its audit of the Internal Revenue Service's (IRS) fiscal year (FY) 1998 financial statements.

What GAO Found

GAO noted that: (1) serious internal control and financial management issues continue to plague the IRS; (2) pervasive weaknesses in the design and operation of IRS' financial management systems, accounting procedures, documentation, recordkeeping, and internal controls, including computer security controls, prevented IRS from reliably reporting on the results of its administrative activities; (3) in contrast, IRS was able to report reliably on the results of its custodial activities for FY 1998, including tax revenue received, tax refunds disbursed, and taxes receivable due from the public; (4) this was the second year GAO has been able to render an unqualified opinion with respect to IRS' financial reporting of its custodial activities; (5) this achievement, however, required extensive, costly, and time-consuming ad hoc procedures to overcome pervasive internal control and systems weaknesses; and (6) IRS' major accounting, reporting and internal control deficiencies include: (a) an inadequate financial reporting process that resulted in IRS' inability to reliably prepare several of the required principal financial statements, and financial management systems that do not comply with the requirements of the Federal Financial Management Improvement Act of 1996; (b) the lack of a subsidiary ledger to properly manage taxes receivable and other unpaid assessments, resulting in instances of both taxpayer burden and lost revenue to the government; (c) deficiencies in preventive controls over tax refunds that have permitted the disbursement of millions of dollars of fraudulent refunds; (d) vulnerabilities in controls over tax receipts and taxpayer data that increase the government's and taxpayers' risk of loss or inappropriate disclosure of sensitive taxpayer data; (e) a failure to reconcile its fund balance to Treasury records during FY 1998, and an inability to provide assurance that its budgetary resources are being properly accounted for, reported, and controlled; (f) the inability to properly safeguard or reliably report its property and equipment; and (g) vulnerabilities in computer security that may allow unauthorized individuals to access, alter, or abuse proprietary IRS programs and data, and taxpayer information.