It Is Not Known Whether Contract Provisions Could Contribute to Improper Handling of Taxpayer Receipts

We found nothing inherent in the new 2002 lockbox bank contractual  agreements or the prior agreements that would necessarily contribute to  mishandling of taxpayer receipts. Although a desire to avoid negative consequences, such as  financial penalties or contract termination, could cause lockbox bank  employees to make poor decisions, penalty and termination provisions are  necessary to help the federal government address inadequate contractor  performance. Cause of the 2001 Incident Remains Under Investigation

The exact cause of the 2001 incident involving the loss and destruction of  taxpayer data and receipts at the Pittsburgh lockbox site has yet to be  officially reported. However, we found that the oversight of  lockbox banks was not fully effective in protecting the government’s  interests due to (1) a lack of clear directives and documented policies and  procedures for various oversight functions, (2) key oversight functions not  being performed, and (3) conflicting roles and responsibilities for IRS  lockbox coordinators. Nevertheless, during our recent visits to all nine lockbox locations, we  found internal control deficiencies in the areas of (1) physical security, (2)  processing controls, (3) courier security, and (4) employment screening. A Comprehensive Study Evaluating Costs for IRS Processing Versus Using Lockbox Banks for All Types of Tax Receipts Has Not Been Performed

IRS and FMS have not performed a comprehensive study evaluating the full  range of costs and benefits of IRS processing tax receipts versus the  lockbox banks processing the receipts for all types of tax receipts  processed by the banks. Having adopted this perspective in accordance  with Treasury regulations, IRS and FMS did not consider some costs, such  as opportunity costs, or the results from alternative uses of the money  spent to achieve speedier deposits. These types of studies would  include different costs and benefits from those included in the 1999 study. If IRS and FMS had done a cost-benefit or cost-effectiveness study, the  resulting conclusions may have differed. Conclusions

Approximately $268 billion in tax receipts IRS collected in fiscal year 2002  were processed through lockbox banks. Additionally, numerous  internal control weaknesses need to be corrected and certain provisions of  the lockbox processing guidelines need to be revised. To improve the effectiveness of government oversight of lockbox banks,  we recommend that the Commissioner of FMS and the Acting  Commissioner of IRS  document IRS’s and FMS’s oversight roles and responsibilities in agency  policy and procedure manuals and determine the appropriate level of  IRS and FMS oversight of lockbox sites throughout the year, particularly  during peak processing periods;  establish and document guidelines and procedures in IRS and FMS  policy and procedure manuals for implementing the new penalty  provision for lockbox banks to reimburse the government for direct  costs incurred in correcting errors made by lockbox banks;  finalize and document the recently developed waiver process in IRS and  FMS policy and procedure manuals and ensure that decisions on  requests for waivers are formally and promptly communicated to  lockbox management; and  establish and document a process in IRS and FMS policy and procedure  manuals to ensure that lockbox bank management formally responds to  IRS and FMS oversight findings and recommendations promptly and  that corrective actions taken by lockbox bank management are  appropriate. In addition,  the report will be made available to others at no charge on GAO’s Web site  at http://www.gao.gov. GAO Comments

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Why GAO Did This Study

Lockbox banks are commercial banks that process certain taxpayer receipts on behalf of the Internal Revenue Service (IRS). Following an incident at a lockbox site during 2001, which involved the loss and destruction of about 78,000 tax receipts totaling more than $1.2 billion, the Senate Committee on Finance asked GAO to examine whether (1) provisions of the contracts under which lockbox banks operate address previously identified problems or might contribute to mishandling of tax receipts, (2) oversight of lockbox banks is adequate, (3) internal controls are sufficient, and (4) IRS and Treasury's Financial Management Service (FMS) had considered the costs and benefits of contracting out the functions performed by lockbox banks.

What GAO Found

FMS has contractual agreements with four lockbox banks, which operate 11 lockbox sites at nine locations on IRS's behalf. Of the more than $2 trillion in tax receipts that IRS collected in fiscal year 2002, lockbox banks processed approximately $268 billion. The findings of GAO's study include the following: (1)Nothing inherent in the lockbox contractual agreements would necessarily contribute to mishandling of tax receipts. Although a desire to avoid negative consequences, such as financial or other penalties allowed for by the agreements, could motivate bank employees to make poor decisions, penalty provisions are necessary to help the government address inadequate performance. The results of an ongoing investigation of the 2001 incident may help IRS and FMS determine whether new provisions or modifications to existing provisions are needed. (2) Although IRS and FMS have significantly increased their presence at lockbox sites, oversight of lockbox banks during fiscal year 2002 was not fully effective to ensure that taxpayer data and receipts were adequately safeguarded and properly processed. Inadequate oversight resulted mainly from a lack of clear oversight directives and policies; failure to perform key oversight functions; and conflicting roles and responsibilities of IRS personnel responsible for day-to-day oversight of lockbox banks. (3) Internal controls, including physical security controls, need to be strengthened at IRS lockbox locations. In addition, the processing guidelines under which IRS lockbox banks operate need to be revised to improve receipt-processing controls, employment screening, and courier security. (4) IRS and FMS have not performed a comprehensive study of the costs and benefits of using lockbox banks. The most recent study, in 1999, omitted some costs that may have affected the result. For example, the study did not consider opportunity costs--benefits foregone that might have resulted from alternative uses of the money. Because of these omissions and several changes that have affected costs and benefits, a new study will be needed before lockbox contracts expire in 2007.