As a result, IRS relied on alternative sources, such as Treasury schedules, to obtain the summary total by type of tax needed for its financial statement presentation. In addition to the difference in total revenues collected, we also found large discrepancies between information in IRS’ master files and the Treasury data used for the various types of taxes reported in IRS’ financial statements. In some cases, IRS did not maintain documentation to support reported balances. In other cases, it did not perform adequate analysis, such as reconciling taxpayer transactions to the general ledger, to ensure that reported information was reliable. For example, IRS has successfully implemented a financial management system for its appropriated funds to account for its day-to-day operations, which should help IRS to correct some of its past transaction processing problems that diminished the accuracy and reliability of its cost information, and successfully transferred its payroll processing to the Department of Agriculture’s National Finance Center and, as a result, properly accounted for and reported its $5.1 billion of payroll expenses for fiscal year 1994. In the area of receipt and acceptance, IRS stated that it is more fully integrating its budgetary and management control systems. IRS’ software development capability was immature and weak in key process areas. Finally, IRS had not established an effective organizational structure to consistently manage and control system modernization organizationwide.
Why GAO Did This Study

GAO discussed its: (1) fiscal year 1994 financial audit of the Internal Revenue Service (IRS); and (2) evaluation of the IRS Tax System Modernization (TSM) effort.

What GAO Found

GAO noted that: (1) IRS did not use its revenue general ledger accounting system or its master files for its revenue reports, but relied on alternative sources such as Treasury schedules; (2) there were large discrepancies between information in IRS master files and Treasury data; (3) IRS did not properly document transactions or perform adequate analysis to ensure the reliability of the information it reported; (4) IRS was unable to reconcile its accounts and could not substantiate some of its expenses; (5) IRS has initiated actions to correct some previously identified problems concerning computer security, payroll processing, funds reconciliation and monitoring, its budgetary and management control systems, and receipt balance accuracy; and (6) in spite of those actions, IRS lacks the strategic information management practices, software development capability, systems architecture, and effective organization structure to manage and control system modernization.