Objectives, Scope, and Methodology

The objectives of this report are to (1) assist IRS management in tracking  the status of financial audit and financial management-related  recommendations and the actions needed to address them and   (2) demonstrate how the recommendations fit into IRS’s overall  management and internal control structure. 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. At the same time, however, our audits continue  to identify significant internal control deficiencies, resulting in our making  further recommendations for corrective action, including 22 new financial  management-related recommendations resulting from our fiscal year 2005  financial audit. Status of Recommendations Based on the Fiscal Year 2005 Financial Statement Audit

In April 2005, we issued a report on the status of IRS’s efforts to  implement corrective actions to address financial management  recommendations stemming from our fiscal year 2004 and prior year  financial audits and other financial management-related work. 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 the internal control activities identified in GAO’s Standards for Internal  Control in the Federal Government provides insight regarding their  significance to IRS’s ability to effectively achieve the objectives associated  with the control activities and, thus, to its overall mission and goals. 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. In  addition, the number of staff increases significantly during the peak of the  tax filing season. The following open recommendation would assist IRS in its management  of human capital in its financial operations. 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 6  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 and commitment at the top. 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  these corrective actions and the status of IRS’s progress in addressing all  open recommendations as part of our fiscal year 2006 IRS financial  statement audit. Management  Report:  Improvements  Needed in IRS’s  Internal Controls  (GAO-06-543R,   May 12, 2006)
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 fit into IRS's overall management and internal control structure.

What GAO Found

IRS has made significant progress in improving its internal controls and financial management since its first financial audit in 1992, as evidenced by 6 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 2005 financial statements, 84 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 2005 financial audit, IRS took actions that enabled GAO to close 34 of those recommendations. At the same time, GAO identified additional internal control deficiencies resulting in 22 new recommendations. In total, 72 recommendations currently remain open. To assist IRS in evaluating its internal controls and in making improvements, GAO categorized the 72 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. IRS stated that it is taking action to address the recommendations included in the report. GAO will review the effectiveness of these corrective actions and the status of IRS's progress as part of the fiscal year 2006 audit.