To determine the current status of the recommendations, we (1) obtained  IRS’s reported status of each recommendation and corrective action taken  or planned as of March 2011, (2) compared IRS’s reported status to our  fiscal year 2010 audit findings to identify any differences between IRS’s  and our conclusions regarding the status of each recommendation, and   (3) performed additional follow-up work to assess IRS’s actions taken to  address the open recommendations. IRS Faces Significant Financial Management Challenges

IRS continues to make progress in resolving its internal control  weaknesses and addressing outstanding recommendations, but it still  faces significant financial management challenges. Further,  as in previous years’ audits, our fiscal year 2010 audit continued to identify  additional internal control issues, resulting in 29 new recommendations  for corrective action. As we  reported in our audit of IRS’s fiscal year 2010 financial statements, IRS  has made progress in addressing numerous weaknesses in information  security internal control. We also consider the majority of the recommendations outstanding  from prior years to be short-term; however, a few, particularly those  concerning the functionality of IRS’s automated systems, are complex and  will require several more years to fully and effectively address. Appendix I presents a summary listing of (1) the 85 non-information- systems security–related recommendations based on our financial  statement audits and other financial management–related work that we  had not previously reported as closed and the 29 new recommendations  based on our fiscal year 2010 financial audit, (2) IRS-reported corrective  actions taken or planned as of March 2011, and (3) our analysis of whether  the issues that gave rise to the recommendations have been effectively  addressed, based primarily on the work performed during our fiscal year  2010 financial statement audit. Open Recommendations Grouped by Internal Control Activity

Linking the open recommendations from our financial audits and other  financial management–related work, and the issues that gave rise to them,  to internal control activities that are central to IRS’s tax administration  responsibilities provides insight regarding their significance. Safeguarding of Assets and Security Activities

Given IRS’s mission, the sensitivity of the data it maintains, and its  processing of trillions of dollars of tax receipts each year, one of the most  important control activities at IRS is the safeguarding of assets. This recommendation is short-term in nature. IRS has made  substantial progress in improving its financial management and internal  control since its first financial audit, as evidenced by unqualified audit  opinions on its financial statements for the past 11 years, resolution of  several material internal control weaknesses, significant deficiencies, and  other control issues, and actions taken resulting in the closure of hundreds  of financial management recommendations. This progress has been the  result of hard work by many individuals throughout IRS and sustained  commitment of IRS leadership. Nonetheless, more needs to be done to  fully address the agency’s continuing financial management challenges— resolving material weaknesses and significant deficiencies in internal  control; developing outcome-oriented performance metrics that can  facilitate managing operations for outcomes; and correcting numerous  other internal control issues. Effective implementation of the  recommendations we have made through our financial audits and related  work could greatly assist IRS in improving its internal controls and  achieving sound financial management. IRS also  commented that it is committed to implementing appropriate  improvement to ensure that it maintains sound financial management  practices. The recommendations in table 12 address these  weaknesses. These weaknesses, collectively,  represent a material weakness.
Why GAO Did This Study

In its role as the nation's tax collector, the Internal Revenue Service (IRS) has a demanding responsibility to annually collect trillions of dollars in taxes, process hundreds of millions of tax and information returns, and enforce the nation's tax laws. Since its first audit of IRS's financial statements in fiscal year 1992, GAO has identified a number of weaknesses in IRS's financial management operations. In related reports, GAO has recommended corrective actions to address those weaknesses. Each year, as part of the annual audit of IRS's financial statements, GAO makes recommendations to address any new weaknesses identified and follows up on the status of IRS's efforts to address the weaknesses GAO identified in previous years' audits. The purpose of this report is to (1) provide an overview of the financial management challenges still facing IRS, (2) provide the status of financial audit and financial management-related recommendations and the actions needed to address them, and (3) highlight the relationship between GAO's recommendations and internal control activities central to IRS's mission and goals.

What GAO Found

IRS has made progress in improving its internal controls and financial management since its first financial statement audit in 1992, as evidenced by 11 consecutive years of clean audit opinions on its financial statements, the resolution of several material internal control weaknesses, and actions resulting in the closure of nearly 300 financial management recommendations. This progress has been the result of hard work throughout IRS and sustained commitment at the top levels of the agency. However, IRS still faces significant financial management challenges in (1) resolving its remaining material weaknesses and significant deficiency in internal control, (2) developing outcome-oriented performance metrics, and (3) correcting numerous other internal control issues, especially those relating to safeguarding tax receipts and taxpayer information. At the beginning of GAO's audit of IRS's fiscal year 2010 financial statements, 85 financial management-related recommendations from prior audits remained open because IRS had not fully addressed the underlying issues. During the fiscal year 2010 financial audit, IRS took actions that GAO considered sufficient to close 37 recommendations. At the same time, GAO identified additional internal control issues resulting in 29 new recommendations. In total, 77 recommendations remain open. To assist IRS in evaluating and improving internal controls, GAO categorized the 77 open recommendations by various internal control activities, which, in turn, were grouped into three broad control categories. The continued existence of internal control weaknesses that gave rise to these recommendations represents a serious obstacle for IRS. Effective implementation of GAO's recommendations can greatly assist IRS in improving its internal controls and achieving sound financial management, which are integral to effectively carrying out its tax administration responsibilities. Most recommendations can be addressed within the next year or two. However, a few recommendations, particularly those concerning the functionality of IRS's automated systems, are complex and will require several more years to effectively address.

What GAO Recommends

GAO is not making any recommendations in this report. In commenting on a draft of this report, IRS stated that it is committed to implementing appropriate improvements to maintain sound financial management practices.