Since we first began  auditing IRS’s financial statements in fiscal year 1992, IRS has taken a  significant number of actions that enabled us to eliminate several material  weaknesses and significant deficiencies and to close over 250 of our  previously reported financial management–related recommendations. Specifically, IRS continues to face management  challenges in (1) resolving its two remaining material weaknesses in  internal control, (2) developing performance measures and managing for  outcomes, and (3) addressing its remaining internal control issues,  particularly those dealing with safeguarding of taxpayer receipts and  information. Challenges in Resolving Two Long-standing Material Internal Control Weaknesses

As we reported in our audit of IRS’s fiscal year 2009 financial statements,  IRS’s efforts to address its internal control weaknesses resulted in our  closure of a material weakness in internal control over financial reporting  and a significant deficiency in internal control over tax revenue and  refunds. Successfully addressing the remaining open recommendations would  enhance IRS’s ability to effectively manage for outcomes. 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 combined listing of (1) the 62 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 41 new recommendations  based on our fiscal year 2009 financial audit, (2) IRS-reported corrective  actions taken or planned as of April 2010, 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  2009 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. Resolving the following 18 recommendations  in table 5 would assist IRS in improving its documentation of transactions  and related internal control procedures. 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 10 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 internal control weaknesses; 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  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. IRS also  commented that it is committed to implementing appropriate  improvement to ensure that it maintains sound financial management  practices.
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 10 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 over 250 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 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 2009 financial statements, 62 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 2009 financial audit, IRS took actions that GAO considered sufficient to close 18 recommendations. At the same time, GAO identified additional internal control issues resulting in 41 new recommendations. In total, 85 recommendations remain open. To assist IRS in evaluating and improving internal controls, GAO categorized the 85 open recommendations by various internal control activities, which, in turn, were grouped into three broad control categories: safeguarding of assets and security activities; proper recording and documenting of transactions; and effective management review and oversight. 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. Most can be addressed in the short term (the next 2 years). 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 report, IRS stated that it is committed to implementing appropriate improvements to maintain sound financial management practices.