Over the years since we first began auditing IRS’s  financial statements in fiscal year 1992, we have closed out over 200  financial management-related recommendations we made based on  actions IRS has taken to improve its internal controls and operational  efficiency. These  internal control issues, and the resulting recommendations, can be directly  traced to the control activities in GAO’s Standards for Internal Control in  the Federal Government. Appendix I presents a list of (1) recommendations we have made based on  our financial statement audits and other financial management-related  work that we had not previously reported as closed prior to our fiscal year  2006 audit, (2) the status of each of these recommendations and corrective  actions taken or planned as of April 2007 as reported to us by IRS, and   (3) our analysis of whether the issues that gave rise to the  recommendations have been effectively and fully addressed based on the  work performed during our fiscal year 2006 financial statement audit. Open Recommendations Grouped by 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. IRS is charged with collecting over $2 trillion in taxes each year, a  significant amount of which is collected in the form of checks and cash  accompanied by tax returns and related information. However, IRS also has a number of internal control issues that relate to  recording transactions, documenting events, and tracking the processing  of taxpayer receipts or information, which do not depend upon  improvements in information systems. The following three open short-term recommendations would assist IRS in  its management of human capital. IRS has made  substantial progress in improving its financial management since its first  financial audit, as evidenced by consecutive clean audit opinions on its  financial statements for the past 7 years, resolution of several material  internal control weaknesses, and the closing of hundreds of financial  management recommendations. This progress has been the result of hard  work throughout IRS and sustained commitment of IRS leadership. Nonetheless, more needs to be done to fully address the financial  management challenges the agency faces. Effective  implementation of the recommendations we have made and continue to  make through our financial audits and related work could greatly assist  IRS in improving its internal controls and achieving sound financial  management. We will review the effectiveness of further corrective  actions IRS has taken or will take and the status of IRS’s progress in  addressing all open recommendations as part of our audit of IRS’s fiscal  year 2007 financial statements. IRS’s actions to  address this issue are  currently in process. Management Report:  Improvements  Needed in IRS’s  Internal Controls  (GAO-07-689R,  May 11, 2007)
Because this is a recent  recommendation, GAO did not obtain  information on IRS’s status in  addressing it.
Why GAO Did This Study

In its role as the nation's tax collector, the Internal Revenue Service (IRS) has a demanding responsibility in annually collecting over $2 trillion in taxes, processing hundreds of millions of tax and information returns, and enforcing 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 action to address those weaknesses. Each year, as part of the annual audit of IRS's financial statements, GAO not only makes recommendations to address any new weaknesses identified but also follows up on the status of weaknesses GAO identified in previous years' audits. The purpose of this report is to (1) assist IRS management in tracking the status of audit recommendations and actions needed to fully address them and (2) demonstrate how the recommendations relate to control activities central to IRS's mission and goals. GAO is making no new recommendations in this report.

What GAO Found

IRS has made significant progress in improving its internal controls and financial management since its first financial statement audit in 1992, as evidenced by 7 consecutive years of clean audit opinions on its financial statements, the resolution of several material internal control weaknesses, and the closing of over 200 financial management recommendations. This progress has been the result of hard work and commitment at the top levels of the agency. However, IRS still faces financial management challenges. At the beginning of GAO's audit of IRS's fiscal year 2006 financial statements, 72 financial management-related recommendations from prior audits remained open because IRS had not fully addressed the issues that gave rise to them. During the fiscal year 2006 financial audit, IRS took actions that enabled GAO to close 25 of those recommendations. At the same time, GAO identified additional internal control issues resulting in 28 new recommendations. In total, 75 recommendations currently remain open. To assist IRS in evaluating and improving internal controls, GAO categorized the 75 open recommendations by various internal control activities which, in turn, were grouped into three broad control activity groupings. The continued existence of internal control weaknesses that gave rise to these recommendations represents a serious obstacle that IRS needs to overcome. Effective implementation of GAO's recommendations can greatly assist IRS in improving its internal controls and achieving sound financial management and can help enable it to more effectively carry out its tax administration responsibilities. IRS acknowledged the status of GAO's recommendations and indicated its desire to ensure that its corrective actions appropriately address its internal control issues.