	Disclaimer of Opinion on Statement of Financial Position

We are unable to give an opinion on the Statement of Financial Position as of September 30, 1996, because IRS could not provide adequate documentation to support the classification of its inventory of unpaid assessments as federal tax receivables and compliance assessments. Qualified Opinion on Statement of Custodial Activity

Because IRS could not provide sufficient evidence to support the classification of certain itemized taxes collected and refunded, we could not determine if the classifications of collection and refund amounts by tax type—for example, payroll versus corporate taxes—as reflected on the Statement of Custodial Activity were reliable. IRS management stated that, except for the material weaknesses in internal controls presented in the agency’s fiscal year 1996 FMFIA report on compliance with the internal control and accounting standards, internal controls provide reasonable assurance that the following would be prevented or detected for amounts material in relation to the financial statements: unauthorized acquisition, use, or disposition of assets, that could lead to noncompliance with laws and regulations; and misstatements in amounts reported in the financial statements. Consequently, we believe that the internal controls were not effective in satisfying the objectives discussed above during fiscal year 1996. Based on this, and on our detailed tests of revenue collection and refund transactions, we were able to determine that the total Net Collections of Federal Revenue as reported on the fiscal year 1996 Statement of Custodial Activity was fairly stated in all material respects in relation to the financial statements taken as a whole.
Why GAO Did This Study

Pursuant to a legislative requirement, GAO examined the Internal Revenue Service's (IRS) custodial financial statements for fiscal year (FY) 1996.

What GAO Found

GAO noted that: (1) GAO was unable to give an opinion on the statement of financial position because IRS could not provide adequate documentation to support its balance of federal taxes receivable; (2) the statement of custodial activity was reliable in all material respects, except that sufficient evidence supporting the classification of itemized tax collections and refunds was not available; (3) while GAO found that total collections of federal revenue (net) and total transfers to Treasury, net of refund appropriations, as reported on the statement of custodial activity, are fairly presented in all material respects in relation to the financial statements taken as a whole, the classification of itemized collections and refunds of federal taxes presented on the statement may not be reliable; (4) IRS management asserted that, except for the material weaknesses identified in IRS' FY 1996 Federal Managers' Financial Integrity Act of 1982 report, internal controls were effective in: (a) safeguarding assets; (b) assuring material compliance with laws and regulations; and (c) assuring that there were no material misstatements in amounts reported in the financial statements; (5) consequently, the internal controls were not effective in satisfying the objectives discussed during FY 1996; and (6) material weaknesses in internal control and recordkeeping systems also precluded the tests necessary to provide a basis for any report on compliance with pertinent laws and regulations.