oversight

Internal Revenue Service: Custodial Financial Management Weaknesses

Published by the Government Accountability Office on 1999-08-04.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                  United States General Accounting Office

GAO               Report to the Commissioner of Internal
                  Revenue



August 1999
                  INTERNAL REVENUE
                  SERVICE

                  Custodial Financial
                  Management
                  Weaknesses




GAO/AIMD-99-193
United States General Accounting Office                                                            Accounting Information and
Washington, D.C. 20548                                                                                  Management Division



                                    B-282731                                                                                           Letter

                                    August 4, 1999

                                    The Honorable Charles O. Rossotti
                                    Commissioner of Internal Revenue


                                    Dear Mr. Rossotti:

                                    Over the past 6 years, we have issued numerous reports about the Internal
                                    Revenue Service’s (IRS) internal controls over its financial operations.
                                    These operations dwarf most other financial activities undertaken by any
                                    single entity, public or private, in the world. While the enormity of the task
                                    heightens the need for effective financial management, our previous audit
                                    work identified serious financial management system deficiencies and
                                    internal control weaknesses that have resulted in losses to the federal
                                    government and unnecessary burden to taxpayers. Many of these
                                    deficiencies continued to exist throughout fiscal year 1998. In our report
                                    on the results of our audit of IRS’ fiscal year 1998 financial statements and
                                    in related testimony before Congress, we reported that serious control
                                    weaknesses continue to exist, 1 and that these weaknesses result in our
                                    continuing to identify IRS financial management as a high risk area. 2

                                    This report addresses internal control and compliance issues related to
                                    IRS’ custodial activities, which include collecting federal tax revenues,
                                    refunding tax overpayments, and pursuing collection of amounts owed. It
                                    is one of several reports relating to specific issues we identified in our
                                    fiscal year 1998 audit.3 With regard to these custodial activities, this report
                                    discusses (1) previously reported internal control and compliance issues




                                    1
                                     Financial Audit: IRS’ Fiscal Year 1998 Financial Statements (GAO/AIMD-99-75, March 1, 1999) and
                                    Internal Revenue Service: Results of Fiscal Year 1998 Financial Statement Audit (GAO/T-AIMD-99-103,
                                    March 1, 1999).
                                    2
                                     See High Risk Series: An Update (GAO/HR-99-1, January 1999).
                                    3
                                     We will also be issuing separate reports related to financial management of IRS’ administrative
                                    operations and its computer security.




                   Leter            Page 1                    GAO/AIMD-99-193 IRS Custodial Financial Management Weaknesses
                      B-282731




                      and related recommendations, 4 (2) new issues identified during our fiscal
                      year 1998 financial audit,5 along with new recommendations to address
                      those issues, and (3) additional issues identified from our ongoing fiscal
                      year 1999 financial audit.



Results in Brief      IRS continues to have a broad range of serious internal control weaknesses
                      that have resulted in disbursements of fraudulent and other questionable
                      tax refunds, unnecessary burden to taxpayers resulting from taxpayer
                      receipts stolen by IRS employees, and errors or delays in posting payments
                      to taxpayer accounts. These control weaknesses fall into five major areas:
                      (1) unpaid assessments, (2) security over receipts and taxpayer
                      information, (3) refunds and earned income tax credits, (4) revenue
                      reporting and distribution, and (5) financial reporting. Some weaknesses
                      are long-standing, having been reported since our first audit of IRS’
                      financial statements in fiscal year 1992. 6 In addition, we have found that
                      some weaknesses are more pervasive than we previously reported. For
                      example, we have now found weaknesses over the security of receipts and
                      taxpayer information in varying degrees at all 10 IRS service centers, at
                      other IRS offices, and at banks that process taxpayer receipts for IRS. Until
                      IRS corrects these weaknesses—such as ensuring that taxpayer accounts
                      are properly credited for payments made—these conditions will adversely
                      impact IRS’ ability to provide quality customer service. Weaknesses in the
                      areas we identified include the following:

                      • Unpaid tax assessments. IRS does not have a detailed list, or subsidiary
                        ledger, which tracks and accumulates unpaid assessments and their
                        status on an ongoing basis. As a result, IRS is unable to properly
                        manage its unpaid assessments. Deficiencies in IRS’ systems that track



                      4
                        See Financial Audit: Examination of IRS’ Fiscal Year 1997 Custodial Financial Statements
                      (GAO/AIMD-98-77, February 26, 1998), Internal Revenue Service: Immediate and Long-Term Actions
                      Needed to Improve Financial Management (GAO/AIMD-99-16, October 30, 1998), Excise Taxes:
                      Internal Control Weaknesses Affect Accuracy of Distributions to the Trust Funds (GAO/AIMD-99-17,
                      November 9, 1998), and Internal Revenue Service: Physical Security Over Taxpayer Receipts and Data
                      Needs Improvement (GAO/AIMD-99-15, November 30, 1998).
                      5
                      See Financial Audit: Examination of IRS’ Fiscal Year 1998 Financial Statements (GAO/AIMD-99-75,
                      March 1, 1999).
                      6
                       See Financial Audit: Examination of IRS’ Fiscal Year 1992 Financial Statements (GAO/AIMD-93-2,
                      June 30, 1993) and Financial Management: Important IRS Revenue Information is Unavailable or
                      Unreliable (GAO/AIMD-92-22, December 21, 1993).




              Leter   Page 2                   GAO/AIMD-99-193 IRS Custodial Financial Management Weaknesses
B-282731




    unpaid assessments have resulted in pursuit and collection of amounts
    from taxpayers that had already been paid.
•   Security over receipts and taxpayer information. IRS’ internal controls
    do not adequately safeguard assets such as cash, checks, and sensitive
    taxpayer information from loss or theft. For example, in at least six of
    the service centers, delays in background investigations resulted in
    employees being hired and handling receipts and taxpayer information
    before the results of background checks were available. According to
    IRS, at four of these service centers, background check results disclosed
    that 273 (5 percent) of approximately 5,400 employees hired to handle
    taxpayer data and/or receipts, had falsified key information on their
    applications. Of the 273 employees, 64 (23 percent) had significant
    unsuitable backgrounds, such as criminal convictions, which resulted in
    their termination or forced resignation. As late as March 1999,
    background investigations were still pending on some employees hired
    in fiscal year 1998 and still working for IRS—about 5 months after the
    end of the fiscal year.
•   Refunds and earned income tax credits. IRS continues to lack adequate
    preventive controls to effectively reduce the risk of issuing
    inappropriate refunds. For example, in our fiscal year 1998 audit, we
    continued to find some refunds that should not have been issued. These
    weaknesses in preventive controls over refunds are further exacerbated
    by high amounts of invalid earned income tax credit claims.
•   Revenue reporting and distribution. IRS cannot routinely track and
    report amounts collected for Social Security, Hospital Insurance,
    individual income taxes, and excise tax-related trust funds. Although
    IRS recently changed its method of distributing excise tax receipts to
    comply with the law, the new method is complex, cumbersome, and
    prone to significant error. For example, as a result of an IRS error in the
    certification process, all excise tax-related trust funds received
    understated amounts of distributions. For the Highway Trust Fund, this
    error was $92 million. IRS corrected these errors once we brought them
    to its attention.
•   Financial reporting. We continued to find that IRS’ general ledger for
    custodial activities cannot routinely generate reliable and timely
    financial information for management decision-making. IRS’ financial
    systems do not conform to the U.S. Government Standard General
    Ledger and material balances are not supported by subsidiary ledgers.
    Due to these weaknesses, IRS systems do not comply with the Federal
    Financial Management Improvement Act (FFMIA) of 1996, which
    requires that financial management systems comply with federal
    accounting and systems standards.



Page 3              GAO/AIMD-99-193 IRS Custodial Financial Management Weaknesses
             B-282731




             IRS has acknowledged the seriousness of its financial management
             problems and the Commissioner has committed to making necessary
             improvements. Although some needed improvements can be achieved in
             the short term, we recognize that for many weaknesses, systems
             modernization will need to be part of a long-term solution. IRS has
             begun—and in some cases, completed—actions to address some of these
             problems. For example, in the short term, IRS is developing and
             implementing various security procedures to better safeguard cash,
             checks, and taxpayer data. These procedures include purchasing and
             installing equipment that, if properly linked with the FBI, will provide
             fingerprint check results before new employees report to duty. However,
             we recognize that addressing other critical recommendations, such as the
             system deficiencies affecting IRS’ ability to effectively manage and report
             on its unpaid assessments, will require system modifications that could
             take years to fully implement. Such long-term efforts will require sustained
             senior management commitment in order for IRS to have sound financial
             management. To help IRS accomplish these changes, we are making
             several recommendations on the newly reported issues.

             IRS acknowledged the magnitude of its system deficiencies and internal
             control weaknesses in comments on this report. It noted that it was
             working on many of the matters that can be addressed in the short term,
             but recognized the long-term challenges posed by many of these issues and
             the need to factor them into its system modernization plans.



Background   IRS is responsible for collecting federal tax revenues, refunding tax
             overpayments, and pursuing collection of amounts owed. In fiscal year
             1998, IRS collected nearly $1.8 trillion in tax revenues, issued $151 billion in
             tax refunds, and had net taxes receivable at fiscal year-end of $26 billion.
             Although most of the $1.8 trillion in revenue was collected by
             intermediaries such as financial depository institutions and transferred
             directly to the Treasury general fund, IRS offices and lockbox banks7
             collected $356 billion in fiscal year 1998. These IRS offices include 10
             service centers nationwide that have collection, refund and enforcement
             responsibilities, as well as district and post-of-duty offices that IRS has


             7
              A lockbox bank refers to a commercial bank with a designated post office box to which taxpayers are
             instructed to mail their payments and related tax documents. These lockbox banks process the
             documents, deposit the payments, then forward the documents and data to the service centers to
             update taxpayers’ accounts.




             Page 4                   GAO/AIMD-99-193 IRS Custodial Financial Management Weaknesses
                         B-282731




                         established to assist taxpayers and perform collection and enforcement
                         activities. Ten commercial lockbox banks also receive and process
                         taxpayer receipts, then forward the tax data to IRS for input and
                         processing.8

                         Fiscal year 1997 marked the first time we were able to conclude that
                         financial information, as presented in IRS’ custodial financial statements,
                         was reliable. For fiscal year 1998 we again concluded that IRS’ tax
                         revenues, refunds, and net taxes receivable were reliable.9 However, in
                         both years, we were able to reach this conclusion only after IRS applied
                         extensive ad hoc programming and analysis to its financial information,
                         resulting in material adjustments to derive reliable amounts and balances
                         for its tax administration activities reported in the financial statements.
                         These extensive procedures are needed to compensate for chronic system
                         deficiencies that prevent IRS from having custodial information readily
                         available for routine use, reporting, and decision-making.



Objectives, Scope, and   The objectives of this report are to (1) discuss previously reported internal
                         control and compliance issues and related recommendations, (2) present
Methodology              new issues identified during our fiscal year 1998 financial audit, along with
                         new recommendations to address those issues, and (3) present additional
                         issues identified from our ongoing fiscal year 1999 financial audit.
                         Appendix I provides further details on our scope and methodology.

                         We conducted our work from April 1998 through April 1999 in accordance
                         with generally accepted government auditing standards and Office of
                         Management and Budget (OMB) Bulletin 98-08. We requested comments
                         on a draft of this report from the Commissioner of Internal Revenue or his
                         designee. The Commissioner’s designee provided us with written
                         comments, which are discussed in the “Agency Comments and Our
                         Evaluation” section and reprinted in appendix III.




                         8
                          Treasury’s Financial Management Service contracts with such banks on IRS’ behalf.
                         9
                          During fiscal year 1998, IRS combined the financial reporting of its administrative and custodial
                         activities, which had previously been reported and audited separately, into a single set of principal
                         financial statements. This required IRS to include both administrative and custodial activities on its
                         balance sheet. Our opinion on the statement of custodial activity was unqualified. However, our
                         opinion on the balance sheet was qualified due to administrative issues, not custodial issues. These
                         administrative issues will be covered in a separate report.




                         Page 5                    GAO/AIMD-99-193 IRS Custodial Financial Management Weaknesses
                                                B-282731




Significant Weaknesses                          IRS continues to lack controls to ensure effective management and
                                                accurate reporting of unpaid assessments. 10 For example, IRS does not
Continue to Hinder                              have a subsidiary ledger which tracks and accumulates unpaid assessments
IRS’ Ability to Manage                          and their status on an ongoing basis, the absence of which adversely affects
                                                its ability to effectively manage and accurately report these assessments.
Unpaid Assessments                              As a result, it cannot readily prevent or detect errors in the accounts of
                                                taxpayers that owe such assessments. In some instances, this can result in
                                                taxpayers being pursued for amounts that have already been paid; in other
                                                instances, it can result in lost revenue to the government. Table 1
                                                summarizes the weaknesses we identified related to unpaid assessments,
                                                both in the past and in our most recent work along with their effect and
                                                IRS’ actions to address these issues.



Table 1: Internal Control and Compliance Issues Related to Unpaid Assessments

Internal control/compliance issues and effects                          IRS actions to address issues
Issues previously reported
Issue: IRS lacks a subsidiary ledger to track and accumulate            IRS action: IRS plans to implement a new subsidiary ledger
unpaid assessments. To compensate, it must use ad hoc programs          system as part of its systems modernization effort. In the
to classify the categories of its unpaid assessments for the annual     meantime, IRS must continue to use its ad hoc programs to prepare
financial statements.                                                   its financial statements.
Effect: IRS cannot routinely distinguish categories of taxes due        GAO response: Weaknesses will continue to exist in this area until
and their status.                                                       an effective subsidiary ledger is established.
Issue: Key IRS systems are not linked to ensure that all parties     IRS action: IRS issued directives to service center staff to reiterate
liable for particular assessments receive proper credit for payments that they must manually eliminate assessments that have already
against those assessments.                                           been paid from all taxpayer accounts.
Effect: GAO has found taxpayers were erroneously pursued for            GAO response: Based on our fiscal year 1998 audit results, IRS’
nonpayment or had liens placed on their property even though the        efforts to manually fix these problems were ineffective. Unless IRS
liability had already been paid.                                        is able to develop effective solutions, these problems will likely
                                                                        continue.
Issue: IRS had problems locating adequate supporting documents IRS action: IRS does not plan to implement our previous
for individual unpaid balances.                                       recommendation to establish checklists for collection documents
                                                                      until January 2001.
Effect: IRS may find it difficult to identify and focus collection    GAO response: While some improvements were noted, we found
efforts on cases most likely to be collectible. This condition also   IRS still had trouble providing support for bankruptcy, nonestate
makes it difficult to assess the classification and collectibility of installment agreement, and older cases. Weaknesses will likely
unpaid assessments.                                                   continue in this area until further corrective action is taken.
                                                                                                                                       (continued)

                                                10
                                                  Unpaid assessments consist of amounts for which (1) IRS can support the existence of a receivable
                                                through taxpayer agreement or a favorable court ruling (federal taxes receivable), (2) neither the
                                                taxpayer nor the court has affirmed that the amounts are owed (compliance assessments), and (3) IRS
                                                does not expect further collections due to factors such as the taxpayer’s death, bankruptcy, or
                                                insolvency (write-offs).




                                                Page 6                   GAO/AIMD-99-193 IRS Custodial Financial Management Weaknesses
                                              B-282731




Internal control/compliance issues and effects                         IRS actions to address issues
                        a
Newly reported issues
Issue: Delays are occurring in posting trust fund recovery penalty IRS action: IRS has not identified plans to address this issue.
tax assessments to taxpayer accounts.
Effect: Such delays have resulted in refunds being issued to       GAO response: We will follow-up on this issue as part of our audit
taxpayers that have an outstanding tax liability.                  of IRS’ fiscal year 1999 financial statements.
Issue: IRS does not ensure that installment agreements with            IRS action: IRS issued a memorandum and guidance for revenue
taxpayers fully satisfy outstanding tax liabilities.                   officers to reiterate that new installment agreements must fully
                                                                       satisfy the tax liability.
Effect: IRS is not in compliance with the Internal Revenue Code,       GAO response: We will follow-up on this issue as part of our audit
Section 6159.                                                          of IRS’ fiscal year 1999 financial statements.
                                              a
                                               These consist of internal control or compliance issues first reported in our report on IRS’ fiscal year
                                              1998 financial statements, see GAO/AIMD-99-75, March 1, 1999.


                                              As the table shows, problems in managing and reporting unpaid
                                              assessments are pervasive. Typically, an entity’s accounts receivable
                                              balances would be supported by detailed records, listings, or a subsidiary
                                              ledger of individual amounts. To compensate for the lack of an unpaid
                                              assessment subsidiary ledger, IRS uses ad hoc programs that extract data
                                              from the tax master files—its database of taxpayer information. These
                                              programs classify such assessments into the three categories needed for
                                              financial reporting: taxes receivable, compliance assessments, and
                                              write-offs. However, as in past years, the results still required significant
                                              adjustments totaling tens of billions of dollars before taxes receivable
                                              could be reliably reported on the balance sheet.11 This is due in part to the
                                              fact that, lacking detailed records, IRS can only determine the amounts for
                                              each category by projecting the results of a statistical sample of its unpaid
                                              assessments. Figure 1 shows the level of adjustments needed in fiscal year
                                              1998 to arrive at reliable, auditable amounts for each category of unpaid
                                              assessments. Until IRS makes significant improvements in its systems,
                                              large adjustments will continue to be necessary to properly classify unpaid
                                              assessments due to IRS’ reliance on ad hoc procedures and projections.




                                              11
                                               In accordance with Statement of Federal Financial Accounting Standards (SSFAS) No. 7, taxes
                                              receivable is the only category of unpaid assessments that is included on the balance sheet.




                                              Page 7                    GAO/AIMD-99-193 IRS Custodial Financial Management Weaknesses
B-282731




Figure 1: Comparison of Unpaid Assessments Before and After Audit Adjustments
as of September 30, 1998
Billions of Dollars
                                                            119
120
         110

100

                  81                                83
 80


 60                            54


 40
                                        22
 20


  0


          Taxes               Compliance           Write-offs
          receivable

             Before Audit Adjustments
             After Audit Adjustments


Note: The adjusted balance of taxes receivable presented represents the gross taxes receivable (does
not include the allowance for doubtful accounts). Also note that the total unadjusted unpaid
assessment balance of $247 billion reflected in this figure was adjusted to $222 billion, due primarily to
duplicate assessments and errors.
Source: IRS master files and IRS fiscal year 1998 financial statements.


The subsidiary ledger weakness is particularly illustrative of the need to
make changes, because it continues to have direct consequences on
taxpayers. The consequences we identified primarily involved a type of
assessment called a trust fund recovery penalty (TFRP) assessment. This
assessment occurs when a business does not pay IRS the payroll taxes 12
that have been withheld “in trust” on behalf of the federal government from
employee wages. Each officer of a business can be individually liable for
the amounts withheld from employees, provided the officers are found
willful and responsible for the nonpayment of these taxes. To collect these


12
  Payroll tax withholdings are comprised of individual income tax withholdings and employer and
employee withholdings for the Federal Insurance Contribution Act (FICA), which include Social
Security and Hospital Insurance taxes.




Page 8                    GAO/AIMD-99-193 IRS Custodial Financial Management Weaknesses
B-282731




taxes, IRS can assess several business officers individually for the amounts
withheld from employees but not paid to the government. However, while
these trust fund recovery penalty assessments can be recorded against
several officers in addition to maintaining the original taxes owed by the
business, IRS can collect the amount owed only once.

In our fiscal year 1997 audit, we reported that TFRP payments were not
accurately recorded to reflect each responsible party’s tax liability
reduction in more than half of the cases we reviewed. In some cases, this
resulted in the withholding of refunds due to certain taxpayers and liens
remaining on taxpayers’ personal properties even though the liabilities had
already been paid in full. Similarly, we found in this year’s audit that in 56
of 106 cases (53 percent) reviewed involving TFRP assessments for unpaid
payroll and excise tax withholdings, payments were not accurately
recorded to reflect each responsible party’s tax liability reduction.

Conversely, we also found for fiscal year 1998 that delays in posting the
TFRP assessments to all the related parties resulted in refunds being issued
to taxpayers before they could be offset against amounts owed. We found
instances where such assessments were not made for several years. For
example, in one case, an officer of a bankrupt business—who was also
later found liable for a portion of the business’s unpaid payroll taxes—
received two refunds totaling almost $10,000 during the first 38 months
after the business defaulted on its payroll taxes. This occurred because the
officer was not assessed for the employee portion of the unpaid payroll
taxes until 40 months after the taxes were first due. In another case, the
officers of a bankrupt business were not assessed a TFRP until 54 months
after the first period in which the payroll taxes were due. Refunds issued
to two officers totaling almost $4,000 were issued 48 months after the
business defaulted on its payroll taxes. These refunds could have been
offset against outstanding tax liabilities if IRS had more quickly identified
and recorded these TFRP assessments to the taxpayers’ accounts.

For the weaknesses we previously identified, IRS has taken some
corrective actions and other actions are planned.13 For example, we noted
some improvements in the documentation supporting its unpaid
assessments and in its ad hoc computer programs for extracting master file
data for the financial statements. However, improvements in other areas


13
  See appendix II for a specific list of all pertinent recommendations from previous audits and the status
of IRS’ actions to address them, i.e., recommendations 2 through 8.




Page 9                     GAO/AIMD-99-193 IRS Custodial Financial Management Weaknesses
B-282731




will not occur for many years. Specifically, significant improvements will
not be possible until a subsidiary ledger with appropriate links between
related TFRP assessments and payments is established, an action IRS
currently has no firm plans to implement. Our work showed that over
185,000 taxpayers have 237,000 TFRP assessments and that over 50 percent
of TFRP cases reviewed had errors in crediting payments for related
accounts. Until IRS can greatly improve the accuracy of its individual
unpaid assessments, many taxpayers will continue to be vulnerable to
unwarranted collection actions. In addition, the government will continue
to be vulnerable to a preventable loss of revenue from issuing refunds to
taxpayers that owe taxes. As noted in a prior GAO report,14 the significance
and magnitude of this problem requires interim solutions to address these
issues, even if such solutions require manual procedures, such as manually
cross-linking taxpayer data.

Our fiscal year 1998 audit also disclosed that IRS did not have procedures
in place to ensure that installment agreements for repaying tax
assessments provide for payment of the full amount of taxes due, as
required by Section 6159 of the Internal Revenue Code. Our detailed
testing of 93 installment agreements showed that in 48 cases (52 percent),
the installment agreement terms did not provide for the full payment of the
taxes due prior to the end of the statutory collection period (generally 10
years). In one case, the installment agreement required the taxpayer to pay
$25 a month toward an outstanding tax liability of over $16 million. At the
end of the statutory collection period, such payments would have totaled
$1,625, far less than 1 percent of the amount due.15 In another instance, the
installment agreement would result in repayment of $65,450 of a
$1.5 million amount due (4 percent). IRS began addressing this weakness
during fiscal year 1998, first by issuing a March 1998 memorandum
reiterating that under any new installment agreement, the taxpayer must
fully satisfy the tax liability, and second by issuing new guidelines in August
1998. However, IRS does not have monitoring procedures in place to
ensure that the new guidelines are being followed across the country. We
will assess the success of these corrective actions during our fiscal year
1999 audit.16


14
 GAO/AIMD-99-16, October 30, 1998.
15
 The amount due includes the original tax liability plus penalties and interest.
16
  Previous recommendations related to unpaid assessments are listed in appendix II, recommendations
2 and 5 through 8.




Page 10                   GAO/AIMD-99-193 IRS Custodial Financial Management Weaknesses
                        B-282731




Recommendations         To address delays in posting trust fund recovery penalty assessments, we
                        recommend that IRS analyze and determine the factors causing delays in
                        processing and posting all such assessments. Once these factors have been
                        determined, we recommend that IRS develop procedures to reduce the
                        impact of these factors to ensure timely posting to all applicable accounts
                        and proper offsetting of refunds against unpaid TFRP assessments before
                        issuance.

                        To ensure compliance with Section 6159 of the Internal Revenue Code, we
                        recommend that IRS identify and institute procedures to monitor
                        compliance of installment agreements. Such monitoring should ensure
                        that the installment agreements provide for full payment of the taxes owed.
                        For example, management could randomly select installment agreements
                        from all of its units to review for compliance with the code.



Inadequate Controls     As we have previously reported, IRS’ controls over cash, checks, and
                        related hard-copy taxpayer data it receives from taxpayers are not
Over Manual Tax         adequate. We recognize that because receipts and taxpayer data are
Receipts and Taxpayer   inherently vulnerable, some thefts are inevitable. However, while IRS has
                        made some improvements, further actions and policy changes are needed
Information             to mitigate risks. In addition, consistent implementation of new and
                        existing policies will require regular headquarters follow-up and
                        monitoring. We previously reported our findings in this area with regard to
                        several service centers and district offices visited, but we have
                        subsequently identified similar conditions in varying degrees at all 10
                        service centers, additional district offices, IRS post-of-duty offices, and at
                        commercial lockbox banks.

                        The pervasiveness and sensitivity of this condition emphasizes the need for
                        IRS to act quickly and aggressively to properly safeguard assets and protect
                        taxpayer data. The potential for loss and taxpayer burden can be seen in
                        the number of employee theft-related investigations opened by IRS in fiscal
                        years 1997 and 1998—specifically, 56 cases involving actual or alleged theft
                        of about $1 million in receipts at IRS field offices and lockbox banks, and
                        another 100 cases in which the amount was not quantified. Because some
                        thefts have likely gone unidentified or undetected, actual losses may be
                        much greater. Table 2 summarizes the weaknesses we identified in this
                        area, both in the past and in our most recent work with their effects and
                        IRS’ actions to address these issues.




                        Page 11            GAO/AIMD-99-193 IRS Custodial Financial Management Weaknesses
                                               B-282731




Table 2: Internal Control Issues Related to Manual Receipts and Taxpayer Data

Internal control issues and effects                                    IRS actions to address issues
Issues previously reported
Issue: Service centers had insufficient controls to deter employee     IRS actions: IRS is studying potential deterrents. While some
theft of receipts and data in receipt processing areas. For example,   service centers have lockers for receipt-processing staff to store
there were no surveillance cameras and employees were allowed          personal items, IRS is currently conducting space feasibility studies
to bring in personal belongings such as purses and lunchboxes that     at others. According to IRS, based on the results of the feasibility
could be used to conceal receipts.                                     studies, a plan will be initiated by December 1999.
Effect: Such weaknesses increase the exposure of IRS and               GAO response: IRS continues to lack surveillance cameras in its
taxpayers to loss or theft.                                            receipt processing areas and the availability of lockers and
                                                                       enforcement of their use is inconsistent.
Issue: Mail containing cash and checks was received and opened IRS actions: IRS issued a policy in November 1998 to require all
outside controlled areas.                                          mail, except confidential mail, to be routed through the receipt
                                                                   processing function.
Effect: Uncontrolled areas are more vulnerable to loss or theft of GAO response: Follow-up is planned for fiscal year 1999.
receipts and taxpayer data.
Issue: Tax payments were received by personnel, such as security IRS actions: IRS issued a policy in December 1998 requiring that
guards, that are not authorized to accept payments.              service center deposit units be contacted when security guards and
                                                                 unauthorized personnel are approached by taxpayers with
Effect: Receipts are vulnerable to theft or loss.                payments.
                                                                       GAO response: Based on our visits to service centers, security
                                                                       guards and other unauthorized personnel do not accept payments.
Issue: Delays in obtaining fingerprint and background information    IRS actions: IRS purchased and installed 27 fingerprinting
on IRS employees allowed staff with previous convictions, and        machines compatible with FBI’s systems and expects FBI to fully
unsuitable backgrounds, to process taxpayer receipts and data.       implement the system by July 1999. IRS expects the fingerprint
                                                                     system to improve the timeliness of fingerprint results. It expects to
Effect: Receipts and taxpayer data are at unnecessary risk of theft. have these measures in place for the 2000 filing season.
                                                                       GAO response: In April 1999, we visited some sites and saw that
                                                                       the new fingerprinting machines had been installed. We will
                                                                       perform further follow-up for fiscal year 1999 to determine whether
                                                                       IRS has fully interfaced its fingerprinting machines with the FBI’s
                                                                       system.
Issue: Daily deposits, which may total hundreds of millions of     IRS actions: IRS issued a directive in April 1999 that requires
dollars, are transported to banks via unarmed, unescorted couriers offices to use bonded couriers with locked, enclosed vehicles to
in unsecured vehicles and on bicycles.                             deliver tax receipts. IRS reported it is also upgrading service center
                                                                   requirements to include the use of armed couriers and plans to
Effect: Such security does not adequately protect deposits and     have all field offices send tax receipts by overnight mail to
sensitive taxpayer data from theft while in transit.               designated service centers by August 1999.
                                                                       GAO response: Follow-up was performed in April 1999. Although
                                                                       this new policy was issued, we found that it had not been fully
                                                                       implemented. We will perform additional follow-up for the fiscal
                                                                       year 1999 financial statement audit.
                                                                                                                                  (continued)




                                               Page 12                  GAO/AIMD-99-193 IRS Custodial Financial Management Weaknesses
                                                B-282731




Internal control issues and effects                                   IRS actions to address issues
Issue: Service centers and district offices stored receipts and       IRS actions: IRS is developing plans to address most of these
taxpayer data in unsecured areas or in open containers.               issues, such as (1) ensuring that each service center has
                                                                      appropriate containers to secure unmatched checks by August
Effect: IRS and taxpayers are exposed to potential losses and         1999 and (2) developing guidelines requiring district offices to
fraud.                                                                maintain receipts in locked containers.
                                                                      GAO response: Follow-up is planned for fiscal year 1999.
Newly reported issues
Issue: Inadequate internal controls similar to those previously        IRS actions: IRS has issued a new policy regarding the
identified were also found at post-of-duty offices, such as storage of safeguarding of receipts at district and post-of-duty offices.
receipts and taxpayer data in unsecured areas or in open
containers.                                                            GAO response: Follow-up was performed in April 1999. Although
Effect: IRS and taxpayers are exposed to potential losses and          this new policy was issued, we found that it had not been fully
fraud.                                                                 implemented. We will perform additional follow-up for the fiscal
                                                                       year 1999 financial statement audit.
Issue: Inadequate internal controls similar to those previously      IRS actions: IRS has not yet reported plans to address lockbox
identified were also found at lockbox banks, including use of        banks.
unarmed, unsecured couriers for transporting checks and taxpayer
data, and receipt processing staff starting work prior to completion
of fingerprint or background checks.
Effect: IRS and taxpayers are exposed to potential losses and
fraud.
Issue: Additional weaknesses were identified related to courier          IRS actions: As discussed above, IRS issued a directive in April
security. For example, one service center included cash in its           1999 regarding improvements to be made to courier security.
deposits and one post-of-duty office used an IRS employee to
deliver its receipts with no audit trail to track that the receipts were
deposited. Also, deposits at one district office were transported on
foot.
Effect: IRS and taxpayers are exposed to potential losses and
fraud.
Issue: IRS’ procedures for accepting walk-in payments at service  IRS actions: IRS has not yet reported plans to address these
centers do not adequately protect taxpayer receipts and data from issues.
loss. Generally receipts are not prepared and provided to
taxpayers and payments are not logged in to ensure completeness
of receipts and to reconcile to deposits.
Effect: IRS and taxpayers are exposed to potential theft or loss.
Issue: Scope of background checks required of lockbox employees IRS actions: IRS has not yet reported plans to address these
was inconsistent and less than that required of IRS employees.  issues.
Effect: IRS and taxpayers are exposed to potential theft or loss.
Issue: One district office staff was unaware of fingerprinting        IRS actions: According to IRS district office management, all staff
requirements for applicants. As a result, some temporary              involved with fingerprint and background checks were informed of
employees were hired without fingerprint checks.                      correct procedures.
Effect: IRS and taxpayers are exposed to potential theft or loss.     GAO response: Follow-up is planned for fiscal year 1999.
Issue: Employees at one post-of-duty office were not aware of         IRS actions: According to IRS post-of-duty management,
requirement to overstamp checks made out to “IRS” or were not         responsible employees were reminded of the policy.
doing so promptly.
Effect: IRS and taxpayers are exposed to potential theft or loss.     GAO response: Follow-up is planned for fiscal year 1999.




                                                Page 13                GAO/AIMD-99-193 IRS Custodial Financial Management Weaknesses
B-282731




Many of our findings in this area stem from our fiscal year 1997 audit work.
We subsequently identified additional findings during a review of controls
over receipts and taxpayer data at selected service centers and district
offices during the April 1998 peak filing season. We issued a separate
report17 on these latter findings in November 1998. However, additional
testing we conducted to complete our fiscal year 1998 audit, as well as
work performed as part of our ongoing fiscal year 1999 financial audit,
showed that more weaknesses existed at other service centers, district and
post-of-duty offices, and lockbox banks. These weaknesses increase the
vulnerability of receipts and taxpayer information to theft, fraud, or loss to
both taxpayers and the government. Specifically, we have identified the
following weaknesses relating to background checks at IRS offices and
lockbox banks.

• In at least six service centers, delays in background investigations
  resulted in employees being hired and processing receipts and taxpayer
  data before the results of their fingerprint/background checks were
  completed. According to IRS, at four of these service centers,
  background check results disclosed that 273 (5 percent) of about 5,400
  employees hired to handle taxpayer data and/or receipts had falsified
  key information on their applications. Of the 273 employees, 64 (23
  percent) had significant unsuitable backgrounds, such as criminal
  convictions, which resulted in their termination or forced resignation.
  As late as March 1999, background investigations were pending on some
  employees hired in fiscal year 1998 and still working for IRS—over 5
  months after the end of the fiscal year. Similarly, temporary employees
  at lockbox banks were also hired and handling receipts and taxpayer
  data before the results of their background or fingerprint checks were
  received.
• At one district office, one staff responsible for fingerprint checks was
  not aware that IRS requires temporary employees to be fingerprinted.
  As a result, 14 temporary employees hired during fiscal year 1999 were
  not initially fingerprinted.
• At lockbox banks, we found that the scope of background checks
  required of lockbox employees was inconsistent among the banks and
  was less than that required of IRS employees. For example, one
  lockbox bank performed background checks that encompassed only the
  county in which the temporary employees currently reside while at
  another lockbox bank, the scope of background checks for temporary


17
 GAO/AIMD-99-15, November 30, 1998.




Page 14                GAO/AIMD-99-193 IRS Custodial Financial Management Weaknesses
B-282731




    employees included the entire state. In contrast, IRS temporary
    employees are subject to nationwide background checks. We found
    that this inconsistency was due to ambiguous language contained in the
    standard statement of work for the lockbox banks regarding
    background checks for employees, which was thus subject to differing
    interpretations by the banks.

Another pervasive control weakness was the inadequate security over
deposits and taxpayer data transported to banks and service centers. In
our earlier report on conditions during the peak period of the 1998 filing
season, we reported that at four service centers we visited, unarmed
couriers working alone picked up deposits—$100 million to $200 million
twice a day—for transporting to a bank for deposit. Some of these deposits
were left in unsecured, unattended vehicles. Subsequent audit work
identified similar weaknesses at additional locations. For example,

• At one service center, the courier did not have credentials identifying
  him as the authorized courier. He picked up receipts that included
  cash18 and drove off in a car with family members who were not
  authorized to pick up receipts.
• At a district office, one courier picked up the deposit and walked a
  block away to await the arrival of a second courier. During our
  observation, the courier waited 20 minutes for the second courier to
  arrive and, for a time, was joined by another individual. When the
  second courier arrived in a marked courier company truck, the first
  courier handed him the deposit for delivery to the bank. IRS did not
  oversee this transfer to the second courier, nor was the transfer
  documented. When the second courier delivered the deposit, the
  receipt provided by the bank did not document the amount of the
  deposit nor any other identifying information to enable IRS to verify the
  bank received the deposit intact. According to IRS, the district’s
  deposits average about $500,000 to $1 million per day during the
  nonpeak season.
• At another district office, a deposit of $4.5 million was handed by IRS to
  a courier who walked the deposit two blocks to where his bicycle was
  parked. The courier then waited for about 20 minutes for another
  courier driving an unmarked pickup truck. The first courier loaded his
  bicycle onto the truck and waited in the truck with the deposit until the


18
  Other service centers we visited converted cash to a cashier’s check before preparing the deposit or
used an armored courier to transfer cash deposits.




Page 15                   GAO/AIMD-99-193 IRS Custodial Financial Management Weaknesses
B-282731




  second courier returned from briefly delivering a package. The two
  couriers then departed. According to the bicycle courier, the second
  courier later stopped to let him out of the truck and then proceeded to
  the bank with the IRS deposit.
• At one lockbox bank, a substitute courier who did not wear a uniform,
  was unknown by bank staff, and who did not present or display any
  identification, was able to bypass several layers of security to obtain
  unescorted access to the receipt processing area. Within this area, the
  courier was allowed to load boxes of mail containing taxpayer returns
  destined for an IRS service center without being questioned or asked for
  identification.

Additional weaknesses or problems we identified include the following.

• At some district and post-of-duty offices we visited, receipts and
  taxpayer information received by revenue officers and examiners were
  kept in open containers or in unlocked file cabinets in the customer
  service walk-in work area, easily accessible to unauthorized employees
  and in some instances, to the general public.
• At one post-of-duty office, checks made out to “I.R.S.” were not
  overstamped with “Internal Revenue Service” or “United States
  Treasury” to prevent alteration. IRS staff were either not aware of this
  requirement or were not performing it promptly.

For those control weaknesses identified in earlier reports, we made
recommendations that IRS generally agreed with and has either
implemented or made plans to implement. For example, IRS recently
issued a policy prohibiting guards and other unauthorized personnel from
receiving payments. However, the new policy does not require that more
than one person receive walk-in payments and, except for cash, does not
require that receipts be logged. Also, IRS only requires service center staff
to provide receipts to taxpayers making walk-in payments by cash, not for
check or money order payments. In addition, IRS does not post signs
informing taxpayers to request receipts. We will be following up during our
fiscal year 1999 audit on additional actions IRS is taking to address our
recommendations.19




19
  Previous recommendations and IRS’ actions to date related to physical security over manual tax
receipts and taxpayer information are listed in appendix II, recommendations 9 through12 and 20
through 35.




Page 16                  GAO/AIMD-99-193 IRS Custodial Financial Management Weaknesses
                  B-282731




                  IRS has also taken other steps to improve controls over receipts and
                  taxpayer data. As we reported last year, in one scheme, a check made out
                  to “IRS” was altered to a fraudulent payee—“I. R. Smith.”20 For the 1999 tax
                  filing season, IRS revised its form 1040 instructions to instruct taxpayers to
                  make tax payment checks payable to “United States Treasury.” This change
                  in payee should reduce IRS’ vulnerability to stolen checks being altered. To
                  further prevent fraud and theft, IRS has purchased and installed
                  fingerprinting machines compatible with FBI’s system at 17 sites including
                  all 10 service centers and 7 other IRS offices. According to IRS officials,
                  the system is expected to improve turnaround time for fingerprint checks.
                  These same officials stated that IRS is waiting for the FBI to complete the
                  implementation of the system by July 1999.



Recommendations   To address weaknesses in controls over taxpayer data and receipts at IRS
                  district offices and posts-of-duty, we recommend that IRS expand the
                  current review of service center deterrent controls to include similar
                  reviews of controls at IRS district offices and posts-of-duty in areas such as
                  courier security, safeguarding of receipts in locked containers,
                  requirements for fingerprinting employees and requirements for promptly
                  over-stamping checks made out to “IRS” with “Internal Revenue Service” or
                  “United States Treasury.” Based on the results, IRS should make
                  appropriate changes to strengthen its controls at these locations.

                  To improve controls at IRS lockbox banks, we recommend that IRS work
                  with Treasury’s Financial Management Service (FMS) to revise the current
                  lockbox contracts to specifically require that:

                  • background checks be completed before employees begin working;
                  • temporary employees be subjected to background checks that are
                    consistent with those required of IRS employees; and
                  • taxpayer data and receipts in transit from the lockbox banks are
                    appropriately protected.

                  To reduce the vulnerability of walk-in payments to being lost or stolen, we
                  recommend that IRS require service center staff to provide receipts to all
                  walk-in taxpayers regardless of the method of payment. In addition, IRS
                  should post signs reminding taxpayers to request receipts. At service
                  centers not normally equipped to receive walk-in payments, all receipts


                  20
                   GAO/AIMD-99-16, October 30, 1998.




                  Page 17                 GAO/AIMD-99-193 IRS Custodial Financial Management Weaknesses
                                              B-282731




                                              should be logged in to ensure completeness and accuracy of receipts and
                                              deposits.



Weak Preventive                               We recognize that the high volume and nature of refund activity makes it
                                              impossible to completely eliminate the risk that inappropriate refunds are
Controls Over Refunds                         issued. However, IRS continues to lack adequate preventive controls to
and Earned Income                             mitigate the risk of inappropriate refund payments. In addition, earned
                                              income tax credits (EITC) continue to be vulnerable to high rates of invalid
Tax Credits Increase                          claims. Although IRS has detective (postrefund) controls in place, the lack
Risk of Inappropriate                         of adequate preventive controls over these areas unduly exposes the
Payments                                      government to potentially significant losses if refunds are made
                                              inappropriately or revenue owed the government is inappropriately
                                              reduced by invalid claims. Table 3 summarizes the weaknesses we
                                              identified related to refund processing controls, along with their effects
                                              and IRS’ actions to address these issues.



Table 3: Internal Control Issues Related to Refunds and Earned Income Tax Credit Claims

Internal control issues and effects                                  IRS actions to address issues
Issues previously reported
Issue: IRS does not compare tax returns with W-2 and other third     IRS action: IRS has not performed a cost-benefit analysis of
party data at time of filing and instead relies on a comparison      manually comparing W-2 and other third party information to tax
several months later to detect differences.                          returns at the time the returns are received. According to IRS, plans
                                                                     to automate this comparison at the time of filing would require
Effect: This has resulted in the issuance of inappropriate refunds   changes to the tax code and tax document filing process.a
or in reduced revenue to the government.                             GAO response: The capability to perform an automated
                                                                     comparison is still years away. As we previously recommended,
                                                                     IRS should perform a comprehensive cost-benefit analysis to better
                                                                     determine the actual costs and benefits of implementing preventive
                                                                     controls in the short term.
Issue: Gaps in internal controls between IRS’ manual and         IRS action: IRS has plans to automate its process for identifying
automated refund processing systems allowed duplicate refunds to and preventing potential duplicate refunds which it expects to
be paid.                                                         complete in mid-1999.
Effect: Such weaknesses resulted in inappropriate refunds and        GAO response: We will follow up on this issue as part of our audit
thus, financial losses to the government.                            of IRS’ fiscal year 1999 financial statements.
                                                                                                                                (continued)




                                              Page 18                 GAO/AIMD-99-193 IRS Custodial Financial Management Weaknesses
                                              B-282731




Internal control issues and effects                                    IRS actions to address issues
Issue: EITCs are vulnerable to high rates of invalid claims. An IRS    IRS action: IRS started a 5-year compliance initiative to minimize
review of 290,000 tax returns with indications of errors or            losses in this area. This initiative is intended to increase taxpayer
irregularities found that $448 million of the $662 million in EITC     awareness, strengthen enforcement of EITC requirements, and
claims (68 percent) were invalid.                                      research sources of EITC noncompliance.
Effect: Invalid EITC claims may result in reduced revenue to the       GAO response: We will follow up on this issue as part of our audit
government or inappropriate refunds being issued.                      of IRS’ fiscal year 1999 financial statements.
                                              a
                                               Action Plan for GAO Recommendations, A Report to Congress: The Internal Revenue Service’s Plans
                                              for Implementing Financial Statement Audit Recommendations Made by the General Accounting
                                              Office, dated January 8, 1999.
                                              Note: Weaknesses in controls over refunds resulting from delays in posting trust fund recovery penalty
                                              assessments were discussed previously in this report under unpaid assessment issues. (See table 1.)


                                              Our recent work confirmed continuing weaknesses were present in IRS
                                              procedures and systems for issuing refunds to taxpayers. For example,
                                              gaps in controls between IRS’ automated and manual systems continue to
                                              make IRS vulnerable to issuing duplicate refunds. In fact, we noted several
                                              cases in which IRS procedures failed to prevent refunds from being paid
                                              twice–one claim that was processed manually and one processed through
                                              IRS’ automated system. We also found instances where delays in posting
                                              assessments resulted in IRS issuing refunds to taxpayers that had unpaid
                                              tax assessments.

                                              Correcting these internal control weaknesses as quickly as possible is
                                              important because until they are corrected, the government’s exposure to
                                              fraud and financial losses is increased. For example, IRS identified over
                                              $17 million in fraudulent refunds that had been issued during the first 9
                                              months of calendar year 1998.21 However, the full magnitude of fraudulent
                                              and other inappropriate refunds is unknown. As we reported last year,
                                              significant levels of invalid EITC claims further magnify the control
                                              weaknesses over refunds.22 Most of IRS’ efforts under its 5-year
                                              compliance study to minimize losses from EITC claims have not
                                              progressed far enough to make any judgment about their effectiveness.
                                              Therefore, we will continue to monitor IRS’ progress in resolving these
                                              issues during our fiscal year 1999 audit.23



                                              21
                                                IRS was unable to provide information on the extent to which these fraudulent refunds were
                                              recovered.
                                              22
                                                  GAO/AIMD-98-77, February 26, 1998.
                                              23
                                                Previous recommendations related to refunds are listed in appendix II, recommendations 13
                                              through14.




                                              Page 19                    GAO/AIMD-99-193 IRS Custodial Financial Management Weaknesses
                       B-282731




IRS’ Revenue           IRS continues to be unable to routinely track and report how much revenue
                       has been collected for Social Security, Hospital Insurance, and individual
Reporting and          income taxes—three of the federal government’s four largest revenue
Distribution Process   sources. Also, IRS is unable to timely report how much revenue has been
                       collected for the Highway Trust Fund and other excise tax-related trust
Continues to Be        funds. This condition exists because the accounting information needed to
Inadequate and Prone   validate the taxpayer’s liability and record the payment to the proper trust
to Error               fund is provided on the tax return, which is received months after the
                       payment is submitted rather than at the time of payment. Further, the
                       information on the return pertains only to the amount of the tax liability,
                       not the distribution of amounts previously collected.

                       This condition presents a number of reporting limitations with respect to
                       Social Security and Hospital Insurance taxes. For example, payroll taxes
                       collected on behalf of the federal government are deposited in the general
                       revenue fund of the Department of Treasury, from which they are
                       subsequently distributed to the appropriate trust funds. This distribution is
                       based on employee wage information certified by the Commissioner of the
                       Social Security Administration (SSA), not on amounts actually collected for
                       payroll taxes. To the extent that annual payroll tax collections are less than
                       the actual tax liabilities, the government’s general revenue fund subsidizes
                       the Social Security and Hospital Insurance trust funds. The annual amount
                       of this subsidy is unknown because IRS cannot determine the specific
                       amount of revenue it actually collects for Social Security and Hospital
                       Insurance taxes.24 Having the capability to report actual collections of
                       significant taxes such as Social Security would enable IRS to report
                       information useful to interested parties including the Congress.

                       IRS’ inability to timely track and report how much revenue has been
                       collected for excise tax-related trust funds also presents operational issues
                       for IRS and Treasury in the distribution of excise tax receipts to these trust
                       funds. Because data are not available to allocate excise taxes to the
                       appropriate trust funds when deposits are made, the Department of the
                       Treasury uses a process that is complex, cumbersome, and prone to error
                       in order to distribute excise tax receipts to the respective trust funds.


                       24
                        As of September 30, 1998, the estimated amount of unpaid taxes and interest in IRS’ unpaid
                       assessments balance was approximately $38 billion for Social Security and Hospital Insurance. While
                       these totals do not include amounts no longer in the unpaid assessments balance due to the expiration
                       of the statutory collection period, they nevertheless give an indication of the cumulative amount of the
                       subsidy provided from the general fund.




                       Page 20                   GAO/AIMD-99-193 IRS Custodial Financial Management Weaknesses
                                                B-282731




                                                Table 4 summarizes the problems we identified in this area, both in the past
                                                and in our most recent work, together with the effect and IRS’ actions to
                                                address these issues.



Table 4: Internal Control and Compliance Issues Related to Revenue Reporting and Distribution

Internal control/compliance issues and effects                        IRS actions to address issues
Issues previously reported
Issue: IRS is unable to routinely track and report actual revenue     IRS actions: IRS recently completed a study of the capabilities to
collected for specific trust funds and individual income taxes.       capture specific tax type/fee code information and is currently
                                                                      analyzing the study’s results.
Effect: IRS must go through a complex process to determine            GAO response: We will follow up on this issue as part of our audit
(certify) the amounts that should be distributed to the excise tax    of IRS’ fiscal year 1999 financial statements.
trust funds, and cannot separately report the amount of revenue
collected for Social Security, Hospital Insurance, and individual
income taxes.
Issue: IRS certified amounts to be distributed to excise tax trust    IRS actions: IRS developed a method to allocate excise tax
funds based on assessments rather than actual taxes collected.        collections to specific excise taxes and began using this
                                                                      methodology in June 1998.
Effect: IRS’ certification process did not comply with specific       GAO response: The allocation method now complies with the
provisions of the law until June 1998.                                legal requirements; however, we found it is still prone to error.
Issue: IRS lacked adequate controls over the excise tax                 IRS actions: IRS has actions either planned, in process, or
certification process to detect taxpayer errors, data input errors, and implemented to address most of these issues.
errors in preparing the certification.
Effect: Excise tax trust funds may not receive the appropriate          GAO response: We will follow up on this issue as part of our audit
amount of excise tax revenue.                                           of IRS’ fiscal year 1999 financial statements.

Newly reported issues
Issue: IRS’ controls did not always ensure that tax returns were      IRS actions: IRS is determining the cause for posting delays and
recorded timely.                                                      plans to establish additional internal controls once the cause is
                                                                      determined.
Effect: The amounts initially distributed to excise tax-related trust GAO response: We will follow up on this issue as part of our audit
funds may not be timely adjusted through IRS’ certification process. of IRS’ fiscal year 1999 financial statements.


                                                Although IRS has taken some action, problems remain in the excise tax
                                                area. For example, IRS developed a method to allocate payments to
                                                specific excise taxes based on the related records of payments received
                                                and the subsequently provided tax returns. While this method allows IRS
                                                to comply with the law for certifying excise taxes based on collections, IRS
                                                continues to have difficulties certifying the amounts to be distributed to the
                                                excise tax-related trust funds. Our fiscal year 1998 audit continued to
                                                identify fundamental internal control weaknesses over this process.

                                                For example, the new certification process allowed some errors to remain
                                                undetected. Such errors included taxpayer errors made in preparing excise



                                                Page 21                GAO/AIMD-99-193 IRS Custodial Financial Management Weaknesses
B-282731




tax returns that were not detected and corrected by IRS when processing
the returns, IRS errors in inputting excise tax information to its master
files, and IRS erroneous omissions of amounts from the quarterly
certification that should have been distributed to the trust funds. In the
latter case, IRS inappropriately subtracted certain amounts of all excise tax
types from the certification process for the quarter ended December 31,
1997, and, as a result, understated the amounts to be distributed to all trust
funds. We identified the amounts understated for three trust funds: the
Highway Trust Fund (understated by $92 million), Airport and Airways
Trust Fund ($57 million), and Black Lung Disability Trust Fund ($3 million).
These errors occurred even though there was evidence of supervisory
review of the data on the related certification documentation. Upon
bringing these errors to IRS’ attention, they were corrected.

Delays in posting tax returns also resulted in misstatements of amounts
certified. Because specific tax type data are not available to allocate excise
taxes to the appropriate trust funds when deposits are made, Treasury uses
a process to estimate the initial distribution of excise taxes. This process
involves the use of economic models prepared by the Office of Tax Analysis
to estimate the initial distribution of tax receipts. FMS uses these estimates
to prepare entries for the initial distribution to the trust funds, which are
then recorded by the Bureau of Public Debt (BPD) in the books and
records of the trust funds maintained by the Treasury. After the initial
distribution, IRS certifies quarterly the amounts that should have been
distributed to the excise tax-related trust funds using its records of
payments received and the subsequently provided tax returns. FMS uses
these certifications to prepare adjustments to the initial trust fund
distributions, which are then recorded by BPD. However, in one quarter,
we found that IRS did not record all tax returns in time to include them in
the quarterly certification of the amounts that should be distributed to the
various funds. The amount IRS certified to the Highway Trust Fund for the
quarter ended June 30, 1998, included approximately $590 million that was
related to excise tax returns from the previous quarter. IRS officials could
not explain why this occurred, but they identified at least one high-dollar
tax return which was not recorded in time to be included in the
certification for the quarter ended March 31, 1998. Although the
misstatement was corrected the following quarter (when the tax return was
recorded), the condition demonstrates that IRS’ certification process does
not ensure that amounts distributed to excise tax-related trust funds are
timely adjusted.




Page 22            GAO/AIMD-99-193 IRS Custodial Financial Management Weaknesses
                      B-282731




                      As long as IRS lacks the data to identify the specific amount of revenue
                      received for each tax type at the time of payment, IRS, Treasury, and excise
                      tax-related trust funds will continue to depend on a complex, error-prone
                      process for determining revenue distributions. We will follow up on the
                      implementation and effectiveness of IRS actions as part of our fiscal year
                      1999 audit.25



Recommendation        To address delays in recording excise tax returns, we recommend that IRS
                      establish procedures to ensure the prompt recording of tax returns. IRS
                      should implement controls to ensure that excise tax returns are recorded
                      timely and included in the quarterly excise tax trust fund certifications.



Financial Reporting   We continued to find that IRS’ general ledger for custodial activities cannot
                      routinely generate reliable and timely financial information for
Issues Remain         decision-making. This is due to the fact that IRS’ financial systems do not
Unresolved            conform to the U.S. Government Standard General Ledger and subsidiary
                      ledgers do not support material balances. As a result of these weaknesses,
                      IRS systems do not comply with the Federal Financial Management
                      Improvement Act (FFMIA) of 1996, which requires that financial
                      management systems comply with federal accounting and systems
                      standards; these standards include the Standard General Ledger and
                      subsidiary ledgers. IRS’ basic approach to preparing its annual custodial
                      financial statements was designed specifically for the narrowly defined
                      purpose of preparing auditable amounts and balances only at fiscal
                      year-end. This mechanism is not capable of producing reliable agencywide
                      principal financial statements or financial performance information to
                      measure results throughout the year as a management tool, which is a
                      standard practice in private industry and some federal entities. In addition,
                      IRS’ approach relies heavily upon ad hoc computer programming, which
                      requires extensive technical expertise with IRS’ master files—expertise
                      that is possessed by only a limited number of individuals in IRS. Table 5
                      identifies general ledger internal control weaknesses and compliance
                      issues we have identified, along with their effects and IRS’ actions to
                      address these issues.




                      25
                        Previous recommendations related to IRS’ revenue reporting and distribution process are listed in
                      appendix II, recommendations 16 through 19.




                      Page 23                   GAO/AIMD-99-193 IRS Custodial Financial Management Weaknesses
                                                B-282731




Table 5: Internal Control and Compliance Issues Related to Financial Reporting

Internal control/compliance issues and effects                          IRS actions to address issues
Issues previously reported
Issue: IRS’ custodial general ledger system cannot routinely            IRS action: IRS has planned a series of incremental steps to
generate reliable and timely financial information for internal and     develop a system that can generate management reports and
external users.                                                         financial statements beginning in 2000.
Effect: IRS must rely on costly, labor-intensive, and                   GAO response: Until IRS implements a proper general ledger
time-consuming ad hoc programs to extract data requiring                system that complies with federal requirements, it will continue to
significant adjustments to prepare its annual financial statements.     rely on ad hoc procedures that severely limit its ability to obtain and
Consequently, it cannot routinely generate periodic statements or       provide meaningful financial data routinely.
other reliable information as a management tool.
Issue: IRS’ custodial general ledger system does not comply with IRS action: IRS’ systems modernization plan includes developing a
Federal Financial Management System Requirements, federal          new system that will meet requirements, but IRS currently does not
accounting standards, and the U.S. Government Standard General estimate completion until 2009.
Ledger.
Effect: IRS cannot rely on its custodial general ledger to support GAO response: IRS will not achieve compliance within the 3-year
related amounts on the principal financial statements.             time frame required. We will continue to assess IRS’ efforts to
                                                                   address and correct this problem.
Newly reported issues
Issue: The use of interim ad hoc procedures to generate IRS’         IRS action: IRS has not yet developed plans to address this issue.
custodial balances relies on extensive technical expertise with IRS’
master files that is possessed by only a very limited number of
individuals.
Effect: Should these individuals become unavailable for any
reason, IRS would most likely be unable to prepare reliable
custodial balances for its financial statements.

                                                As the table above indicates, correcting these problems will require IRS to
                                                make major changes to its financial systems, which is a long-term process.
                                                Sustained senior management attention to correcting the problems is
                                                important to ensure sound financial management for several reasons:

                                                • The general ledger system currently cannot properly report a reliable
                                                  balance for taxes receivable nor can it report revenue receipts by
                                                  specific tax type, such as the specific amounts collected for Federal
                                                  Insurance Contributions Act (FICA)26 and individual income taxes, even
                                                  though taxes receivable and revenue receipts are the two most
                                                  significant components of IRS’ financial statements. Likewise, it cannot


                                                26
                                                  FICA taxes include both employer and employee contributions. Based on information certified by IRS
                                                and the Social Security Administration, Treasury distributes FICA tax revenue—also referred to as
                                                social security taxes—to three specific trust funds established to finance the federal government’s
                                                principal Social Security programs: the Federal Old Age and Survivors Insurance Trust Fund; the
                                                Federal Disability Insurance Trust Fund; and the Federal Hospital Insurance Trust Fund.




                                                Page 24                  GAO/AIMD-99-193 IRS Custodial Financial Management Weaknesses
B-282731




  provide refund activity by tax type for reporting in the footnotes to the
  financial statements as required by federal accounting standards.
  Consequently, IRS’ custodial general ledger system cannot routinely
  generate reliable and timely financial information for either internal or
  external users.
• Lacking an adequate general ledger system that complies with federal
  requirements, IRS must rely on various costly and time-consuming ad
  hoc procedures and adjustments. These include cumbersome
  procedures for certifying revenue distributions to the various excise tax
  trust funds as well as extensive computer programming to extract
  needed information from its master files to support the preparation of
  its annual financial statements. Addressing these problems through
  costly and time-consuming ad hoc procedures and adjustments, as IRS
  has had to do, is not a sound long-term solution.
• The computer programming needed to extract information from IRS’
  master files requires an extensive technical knowledge of the master
  files which is possessed by very few individuals at IRS. Should these
  individuals become unavailable for any reason, this approach could
  cease to be a viable option, and IRS would be forced to rely on a
  financial reporting process which, in the absence of such specialized
  expertise, cannot generate reliable custodial balances.

In addition, during fiscal year 1998, IRS combined the financial reporting of
its administrative and custodial activities, which had previously been
reported and audited separately, into a single set of principal financial
statements.27 However, IRS has not integrated these separate financial
reporting processes under unified supervision at the operational level. This
lack of uniform supervision limits IRS’ ability to provide integrated IRS
financial reporting in the interim and unnecessarily complicates the annual
financial reporting process.28

In the short term, IRS plans to continue to employ additional manual
procedures until more modernized systems can be developed. Therefore, it
is critical that systems modernization be part of the long-term solution. IRS
plans to implement the first step of its systems modernization plan to begin
to address some of the financial management deficiencies we have


27
 The Department of the Treasury Office of Inspector General audited IRS’ fiscal year 1997
administrative activities.
28
  This issue and related recommendations will be addressed further in a separate report on IRS’
administrative internal controls.




Page 25                   GAO/AIMD-99-193 IRS Custodial Financial Management Weaknesses
                      B-282731




                      identified. While not solving all its problems, improvements planned may
                      help reduce the dependence of IRS on a very limited resource of key
                      employees who understand the master file structure.

                      In addition, the remaining phases of the modernization plan are being
                      reevaluated in light of changes in IRS’ priorities caused by organizational
                      and legislative changes. We will continue to monitor IRS’ plans and
                      progress toward systems modernization in our fiscal year 1999 audit. 29 In
                      the meantime, IRS will continue to depend upon ad hoc procedures for the
                      development of its financial statements for years to come.


Recommendation        We recommend, that as a short-term action, IRS ensure that additional staff
                      are employed and existing staff appropriately cross-trained to be able to
                      perform the master file extractions and other ad hoc procedures needed for
                      IRS to develop reliable balances for financial reporting purposes on a
                      continuing basis.



Agency Comments and   In commenting on this report, the Internal Revenue Service recognized the
                      magnitude of its financial management system deficiencies and internal
Our Evaluation        control weaknesses, and outlined several initiatives planned or in progress
                      that IRS believes will address a number of our short-term issues and
                      recommendations. IRS emphasized the long-term nature of its efforts to
                      improve custodial financial management and the need to integrate these
                      changes into its ongoing systems modernization plans. In future audits, we
                      will continue to monitor the effectiveness of IRS’ initiatives in resolving the
                      issues identified in this report.

                      The complete text of IRS’ response to this report is in appendix III.


                      This report contains recommendations to you. The head of a federal
                      agency is required by 31 U.S.C. to submit a written statement on actions
                      taken on these recommendations. You should send your statements to the
                      Senate Committee on Governmental Affairs and the House Committee on
                      Governmental Reform within 60 days of the date of this letter. A written
                      statement also must be sent to the House and Senate Committees on


                      29
                       A previous recommendation related to financial reporting is listed in appendix II, recommendation 1.




                      Page 26                  GAO/AIMD-99-193 IRS Custodial Financial Management Weaknesses
B-282731




Appropriations with the agency’s first request for appropriations made over
60 days after the date of this letter.

We are sending copies of this report to Senator Ted Stevens, Senator
Robert C. Byrd, Senator Orrin G. Hatch, Senator Max S. Baucus, Senator
Fred Thompson, Senator Joseph Leiberman, Senator William V. Roth,
Senator Daniel P. Moynihan, Representative Bill Archer, Representative
Charles B. Rangel, Representative C.W. (Bill) Young, Representative David
R. Obey, Representative Amo Houghton, Representative William J. Coyne,
Representative Dan Burton, and Representative Henry A. Waxman, in their
capacities as Chair or Ranking Minority Member of Senate and House
Committees and Subcommittees. We are also sending copies of this report
to The Honorable Lawrence Summers, Secretary of the Treasury, and The
Honorable Jacob J. Lew, Director of the Office of Management and Budget.
Copies will be made available to others on request.

Please contact me at (202) 512-9505 or Steven J. Sebastian, Assistant
Director, at (202) 512-9521 if you or your staff have any questions
concerning this report. Other contacts and key contributors to this report
are listed in appendix IV.

Sincerely yours,




Gregory D. Kutz
Associate Director, Governmentwide Accounting
And Financial Management Issues




Page 27            GAO/AIMD-99-193 IRS Custodial Financial Management Weaknesses
Contents



Letter                                                                                                1


Appendix I                                                                                           30
Scope and
Methodology

Appendix II                                                                                          32
Status of GAO
Recommendations on
IRS Custodial Activity

Appendix III                                                                                         41
Comments From the
Internal Revenue
Service

Appendix IV                                                                                          43
GAO Contacts and
Staff
Acknowledgements

Related GAO Products                                                                                 47


Tables                   Table 1: Internal Control and Compliance Issues Related to Unpaid
                           Assessments                                                                6
                         Table 2: Internal Control Issues Related to Manual Receipts and
                           Taxpayer Data                                                             12
                         Table 3: Internal Control Issues Related to Refunds and Earned
                           Income Tax Credit Claims                                                  18
                         Table 4: Internal Control and Compliance Issues Related to Revenue
                           Reporting and Distribution                                                21




                         Page 28           GAO/AIMD-99-193 IRS Custodial Financial Management Weaknesses
         Contents




         Table 5: Internal Control and Compliance Issues Related to Financial
           Reporting                                                                 24
         Table II.1: Fifteen Recommendations on IRS Custodial Financial
           Management That Remained Open                                             32
         Table II.2: Twenty New Recommendations on IRS Custodial Financial
           Management                                                                36
         Table II.3: Seven Recommendations on IRS Custodial Financial
           Management in This Report                                                 39


Figure   Figure 1: Comparison of Unpaid Assessments Before and After Audit
           Adjustments as of September 30, 1998                                       8




         Abbreviations

         BPD        Bureau of the Public Debt
         EITC       earned income tax credit
         FBI        Federal Bureau of Investigation
         FFMIA      Federal Financial Management Improvement Act
         FICA       Federal Insurance Contribution Act
         FMS        Financial Management Service
         IRS        Internal Revenue Service
         OMB        Office of Management and Budget
         SSA        Social Security Administration
         TFRP       trust fund recovery penalty



         Page 29           GAO/AIMD-99-193 IRS Custodial Financial Management Weaknesses
Appendix I

Scope and Methodology                                                                                           Appenx
                                                                                                                     Idi




             As part of our audit of IRS’ fiscal year 1998 financial statements, we
             evaluated IRS’ internal controls, its compliance with selected provisions of
             laws and regulations, and followed up on the status of open
             recommendations. Specifically, we:

             • performed multipurpose tests on selected statistical samples of unpaid
               assessment, revenue, and refund transactions and conducted analytical
               procedures;
             • performed detailed tests of transactions that represent the underlying
               basis of amounts distributed to the Highway, Airport and Airway, and
               Black Lung Disability trust funds;
             • reviewed daily, weekly, and monthly reconciliations, physical
               safeguards, and segregation of duties over cash and checks received and
               processed at service centers, district offices, post-of-duty offices and
               lockbox banks;
             • reviewed specific controls over refund processing and financial
               reporting;
             • interviewed IRS managers at service centers, district offices,
               post-of-duty offices, and lockbox banks, and observed processing
               procedures and controls; interviewed internal audit, internal security,
               and criminal investigation managers at selected service centers and
               district offices;1
             • reviewed IRS’ fiscal year 1998 Federal Managers’ Financial Integrity Act
               Annual Assurance Statement, Action Plan for GAO Recommendations
               dated January 8, 1999, and two IRS letters to Congress dated January 29,
               1999, and February 25, 1999, containing IRS’ responses to
               recommendations in two recent GAO reports on IRS financial
               management;2 and,
             • reviewed IRS’ quarterly certifications of excise tax revenue to the
               Highway, Airport and Airway, and Black Lung Disability trust funds.

             We also examined IRS' financial management systems to enable us to
             report on whether they substantially complied with Federal Financial
             Management Systems Requirements, applicable federal accounting
             standards, and the U.S. Government Standard General Ledger at the
             transaction level, as required by the Federal Financial Management


             1
              The IRS Restructuring and Reform Act of 1998 replaced IRS’ Office of Chief Inspector—which included
             internal audit and internal security—with the Office of the Treasury Inspector General for Tax
             Administration.
             2
              GAO/AIMD-99-15, November 30, 1998 and GAO/AIMD-99-17, November 9, 1998.




             Page 30                  GAO/AIMD-99-193 IRS Custodial Financial Management Weaknesses
Appendix I
Scope and Methodology




Improvement Act of 1996 (FFMIA). In addition, we considered the
implementation guidance for FFMIA issued by OMB on September 9, 1997,
in Bulletin 98-08.

Also, as part of our ongoing audit of IRS’ fiscal year 1999 financial
statements, we performed additional observations of processing
procedures and controls at selected service centers, district offices,
post-of-duty offices, and lockbox banks during the peak period of the 1999
tax filing season.

Our work was performed at IRS' National Office in Washington D.C.; all
10 IRS service centers located across the country; 7 district offices; 7
post-of-duty offices; and 5 lockbox banks.




Page 31                 GAO/AIMD-99-193 IRS Custodial Financial Management Weaknesses
Appendix II

Status of GAO Recommendations on IRS
Custodial Activity                                                                                                                                        Appe
                                                                                                                                                             nIx
                                                                                                                                                               Idi




                                                As of our prior report on the status of GAO recommendations on IRS
                                                custodial activity,1 15 recommendations related to IRS custodial financial
                                                management remained open. These are numbered 1 through 15 and are
                                                listed below with their current status. Since the conclusion of our fiscal
                                                year 1997 audit we have issued two additional reports2 related to IRS
                                                financial management which contained a total of 20 new
                                                recommendations. These are numbered 16 through 35 in the chart below.3
                                                Also, we are making seven new recommendations in this report as a result
                                                of our fiscal year 1998 audit and work performed as part of our ongoing
                                                fiscal year 1999 financial audit. These are numbered 36 through 42 below.
                                                We will continue to monitor IRS’ progress toward addressing each of these
                                                recommendations during our fiscal year 1999 audit.



Table II.1: Fifteen Recommendations on IRS Custodial Financial Management That Remained Open

                                                         Status of GAO recommendations
Recommendations                                          reported by IRS in 1999a                       GAO status of recommendations
Financial Management: Important IRS Revenue
Information Is Unavailable or Unreliable
(GAO/AIMD-94-22, December 21, 1993)
1. Identify reporting information needs, develop         Closed. IRS reported that its contractor       Open. As reported by IRS, the policies
related sources of reliable information, and establish   had completed a draft set of policies          and procedures only cover IRS’
and implement policies and procedures for compiling      and procedures in 1998 for preparing           custodial financial statements and thus,
this information. These procedures should describe       the custodial financial statements.            do not address any of the administrative
any (1) adjustments that may be needed to available                                                     financial statements. Because IRS now
information and (2) analyses that must be performed                                                     prepares one set of financial
to determine the ultimate disposition and                                                               statements, these policies and
classification of amounts associated with in-process                                                    procedures do not cover all of its
transactions and amounts pending investigation and                                                      financial reporting needs.
resolution.
2. Monitor implementation of actions to reduce the       Closed. IRS reported that it would             Open. IRS currently expects to
errors in calculating and reporting manual interest on   increase automation of the manual              complete corrective actions in 2001.
taxpayer accounts, and test the effectiveness of         interest calculations, develop a quality       We will follow up on IRS’
these actions.                                           review process, and measure accuracy.          implementation as part of our fiscal year
                                                                                                        1999 audit.
                                                                                                                                        (continued)




                                                1
                                                 See GAO/AIMD-99-16 appendix II, October 30, 1998.
                                                2
                                                 GAO/AIMD-99-17, November 9, 1998, and GAO/AIMD-99-15, November 30, 1998.
                                                3
                                                 The current status of recommendations related to IRS’ administrative activities will be addressed in a
                                                separate report on IRS’ administrative internal controls.




                                                Page 32                   GAO/AIMD-99-193 IRS Custodial Financial Management Weaknesses
                                               Appendix II
                                               Status of GAO Recommendations on IRS
                                               Custodial Activity




                                                        Status of GAO recommendations
Recommendations                                         reported by IRS in 1999a                   GAO status of recommendations
Financial Audit: Examination of IRS' Fiscal Year
1993 Financial Statements (GAO/AIMD-94-120,
June 15, 1994)
3. Ensure that system development efforts provide       Closed. IRS reported it is continuing      Closed. Although IRS has not yet fully
reliable, complete, timely, and comprehensive           refinement of the Enforcement Revenue      addressed the identified problems, we
information with which to evaluate the effectiveness    Information System, which integrates       have since made several more specific
of its enforcement and collection programs.             data on enforcement recommendations,       recommendations to address IRS’
                                                        assessments, collections, cost, and        ongoing need for more timely and
                                                        case length on closed cases.               accurate information related to its
                                                                                                   efforts, see 5, 8, and 14 through19
                                                                                                   below.
4. Establish and implement procedures to analyze        Closed. IRS reported it had         Closed. Our fiscal year 1998 audit
the impact of abatements on the effectiveness of        implemented program changes to more identified several issues regarding
assessments from IRS' various collections programs.     accurately report on abatements.    abatements that, while needing
                                                                                            attention by IRS management, do not
                                                                                            constitute significant internal control
                                                                                            deficiencies. We are thus closing this
                                                                                            recommendation but have separately
                                                                                            issued a letter to IRS management
                                                                                            discussing the issues identified in our
                                                                                            fiscal year 1998 audit and suggesting
                                                                                            corrective actions to resolve them.
Internal Revenue Service: Immediate and
Long-Term Actions Needed to Improve Financial
Management (GAO/AIMD-99-16, October 30, 1998)
5. Manually review and eliminate duplicate or other     Closed. IRS does not believe this is       Open. We continue to believe this
assessments that have already been paid off to          achievable in the short-term and has       problem’s significance warrants
assure all accounts related to a single assessment      convened a task force to develop           immediate action to prevent further
are appropriately credited for payments received.       programming specifications for             unnecessary taxpayer burden. Waiting
                                                        automating this process in the             for a long-term systems change–which
                                                        long-term.                                 will likely take 10 years or more to
                                                                                                   implement—could continue to subject
                                                                                                   taxpayers to additional costs and
                                                                                                   hardships until the problem is fixed.
6. Improve the accuracy of its master file extraction   Closed. IRS made programming               Closed. Although IRS’ FY 1998 unpaid
programs used to classify unpaid assessments such       changes in FY 1998 that enabled it to      assessment balances required
that, once the extractions are made, any subsequent     extract data that was consistent with FY   significant audit adjustments to correct
adjustments needed would not be material. At a          1997 final reported balances.              misstated and duplicate unpaid
minimum, IRS should consider the nature of the                                                     assessment balances identified by our
adjustments made to the fiscal year 1997 amounts                                                   testing, further refinement of the master
extracted and adjust the extraction programs in                                                    file extraction programs will not
future years accordingly.                                                                          significantly reduce these adjustments.
                                                                                                                                  (continued)




                                               Page 33                 GAO/AIMD-99-193 IRS Custodial Financial Management Weaknesses
                                                 Appendix II
                                                 Status of GAO Recommendations on IRS
                                                 Custodial Activity




                                                          Status of GAO recommendations
Recommendations                                           reported by IRS in 1999a                    GAO status of recommendations
7. Establish minimum documentation standards or           Open. IRS reported it has established a     Open. While we noted some
checklists for collection files. These standards or       task force to develop a corrective action   improvements in our fiscal year 1998
checklists should include minimum documentation           plan, which is expected to include          audit, such as in estate appraisal
and file organization requirements for all taxes          modifying procedures and training           documentation, IRS continued to
receivable and compliance assessment cases,               documents. It expects to accomplish         experience difficulties in providing other
specifying the types of documentation required,           this by January 2001.                       supporting documentation, such as that
standard file organization, and the retention period                                                  for bankruptcy, non-estate installment
that will ensure that such documents are maintained                                                   agreements, and older cases.
until the statute of limitations has expired.
8. Ensure that IRS' modernization blueprint includes      Open. IRS plans to develop a                Open. The success of the database to
developing a subsidiary ledger to accurately and          subsidiary general ledger to identify,      track and link multiple TFRP
promptly identify, classify, track, and report all IRS    classify, track and report all unpaid       assessments depends on service
unpaid assessments by amount and taxpayer. This           assessments except for trust fund           center personnel manually inputting the
subsidiary ledger must also have the capability to        recoveries. However, the plan is            cross-reference information needed to
distinguish unpaid assessments by category in order       expected to include the development of      link these assessments. Therefore,
to identify those assessments that represent taxes        a relational database that has the          even after the database is implemented,
receivable versus compliance assessments and              capability to track and link multiple       it will require significant manual effort to
write-offs. In cases involving trust fund recovery        TFRP assessments.                           ensure that it functions as needed. In
penalties, the subsidiary ledger should ensure that                                                   addition, the capability to ensure that
(1) the trust fund recovery penalty assessment is                                                     TFRP payments are automatically
appropriately tracked for all taxpayers liable but                                                    credited to individual accounts is not
counted only once for reporting purposes and (2) all                                                  currently being developed.
payments made are properly credited to the
accounts of all individuals assessed for the liability.
9. Examine and consider options to increase               Open. IRS is in the process of              Open. We will follow up on IRS’
deterrent controls at service centers. Some options       analyzing all potential deterrents to theft implementation as part of our fiscal year
IRS should examine and consider include:                  of cash, checks, and taxpayer data and 1999 audit.
• installing surveillance cameras to monitor staff        expects to complete its analysis by June
  when they are opening, extracting and sorting the       30, 1999. According to IRS officials, a
  mail, and when they are processing receipts,            plan based on the results of the analysis
• restricting personal items that can be brought into     will be initiated by December 1999.
  the receipt processing areas, such as handbags,
  briefcases, and bulky outerwear, and
• providing lockers and requiring their use for storing
  personal belongings outside of the receipt
  processing areas.
10. Provide adequate training and monitoring of           Open. IRS plans to develop a national       Open. We will follow up on IRS’
extraction unit staff to ensure staff are informed and    training course for mail extraction unit    implementation as part of our fiscal year
properly trained on the proper procedures, and that       staff by August 1999.                       1999 audit.
the procedures are being followed.
11. Limit the units that may receive unopened mail        Closed. IRS issued a policy to route       Open. We will follow up on IRS’
directly to only those units which require                mail through the service centers’ receipt implementation as part of our fiscal year
confidentiality due to the nature of their work. At a     and control function beginning January 1999 audit.
minimum, mail addressed to off-site locations should      1, 1999, except for functions that require
be routed through the service center first to identify    confidentiality due to the nature of their
mail that may contain taxpayer receipts.                  work.
                                                                                                                                        (continued)




                                                 Page 34                  GAO/AIMD-99-193 IRS Custodial Financial Management Weaknesses
                                               Appendix II
                                               Status of GAO Recommendations on IRS
                                               Custodial Activity




                                                       Status of GAO recommendations
Recommendations                                        reported by IRS in 1999a                    GAO status of recommendations
12. Ensure that security guards and other              Closed. IRS issued a December 1998          Closed. While IRS issued a policy
unauthorized service center personnel do not           memorandum (1) prohibiting guards           addressing this issue, we are making an
receive walk-in payments from taxpayers.               and other unauthorized personnel from       additional recommendation to reduce
                                                       receiving payments and (2) specifying       the vulnerability of walk-in payments.
                                                       procedures for deposit unit personnel to    See recommendation 40, below.
                                                       receive such payments from taxpayers.
13. Conduct a cost-benefit study to evaluate           Open. Although IRS agreed that              Open. IRS has yet to conduct a
whether preventive controls, such as manually          reducing invalid refunds up front is        comprehensive study analyzing not only
comparing W-2 and other third party information to     generally preferable, they believed that    the expected additional costs, but also
tax returns at the time returns are received rather    manually comparing W-2s and other           the benefits derived, such as the value
than many months later, would be cost-beneficial.      third party documents during                of invalid refunds that would be
This study should include a complete analysis of the   processing is neither feasible nor          prevented and cost savings from having
projected costs and associated benefits of increases   practical. IRS is requesting a              fewer invalid refunds to pursue and
to preventive controls. If such controls are           programming change to identify              attempt to collect.
determined to be beneficial, IRS should implement      selected returns for reviewing W-2 data
them to the extent practical to reduce the amount of   rather than doing so for all returns.
inappropriate refund payments.
14. Ensure that IRS' modernization blueprint           Open. IRS contends that it plans to      Open. This is a long-term solution for
includes the ability to compare W-2 and other          implement an automated matching of       which IRS does not have an estimated
third-party information to tax returns as they are     W-2 and other third party information to completion date.
processed to further prevent improper refunds from     tax returns as they are processed.
being issued.                                          However, IRS reported that it would
                                                       require changes in the tax code and tax
                                                       document filing requirements.
15. Implement Phase 0 of IRS' systems                   Open. IRS currently plans to implement Open. We will monitor IRS’ progress
modernization plan as quickly as possible. In doing the first step of Phase 0 in 2000.         during our fiscal year 1999 audit.
so, IRS should incorporate plans to ensure that the
resulting system can routinely generate timely and
reliable financial management reports which can be
used by internal and external users and which will
increase the timeliness of preparation and audit of its
annual financial statements. Until Phase 0 is
implemented, IRS should continue to utilize special
computer programs and prepare manual
adjustments, as needed, to derive amounts to be
reported in the financial statements.
                                               a
                                                The “Status of GAO Recommendations Reported by IRS in 1999” is based primarily upon the
                                               following IRS documents: Action Plan for GAO Recommendations, January 8, 1999, and two letters to
                                               Congress dated January 29, 1999, and February 25, 1999, laying out IRS’ response to each of the
                                               recommendations in GAO/AIMD-99-15 and GAO/AIMD-99-17, respectively.




                                               Page 35                 GAO/AIMD-99-193 IRS Custodial Financial Management Weaknesses
                                                 Appendix II
                                                 Status of GAO Recommendations on IRS
                                                 Custodial Activity




Table II.2: Twenty New Recommendations on IRS Custodial Financial Management

                                                          Status of GAO recommendations
Recommendations                                           reported by IRS in 1999a                    GAO status of recommendations
Excise Taxes: Internal Control Weaknesses
Affect Accuracy of Distributions to the Trust
Funds (GAO/AIMD-99-17, November 9, 1998)
16. Determine if it would be cost-effective to develop    Closed. IRS reported that it           Open. We will follow up on IRS’
and implement procedures requiring either key             implemented post-input controls to     implementation during our fiscal year
verification of the assessment amount by excise tax       review all returns with assessments of 1999 audit.
type before final processing or to implement other        $1 million and over and all returns
post-input controls to verify the accuracy of             reporting coal tax assessments of
assessment amounts by tax type. In making the             $100,000 or more. Per IRS, these cover
determination, IRS should consider establishing a         over 92 percent of total excise tax
dollar threshold that would ensure coverage of 90         assessments.
percent of total excise tax assessments from the tax
returns.
17. Revise the Form 720 tax return to reflect a           Open. IRS plans to explore the              Open. This is a mid- to long-term
separate column adjacent to the column for entering       feasibility of adding a column on the       solution. As a result, errors associated
the tax assessment, by abstract number, for the           Form 720 tax return or, alternatively, to   with adjustments affecting specific
taxpayer to report on pages 1 and 2 of the tax return     increase the amount of data captured        excise tax amounts will continue to
claims and adjustments, by abstract number, based         from the Form 720 through its systems       occur in the short term.
on the information the taxpayer reports on Schedule       modernization effort. IRS plans to have
C.                                                        systemic changes in place for the 2002
                                                          filing season.
18. Develop, document, and implement review               Closed. IRS reported it developed new Open. We will follow up on IRS’
procedures over the adjustment and summarization          procedures and checksheets for excise implementation during our fiscal year
of assessment data used in the certifications.            tax trust fund certifications that require a 1999 audit .
Specifically, IRS should require that detailed            separate checksheet for each trust fund.
supervisory review be performed and documented to         Additional staff have been assigned to
ensure that adjustments are reasonable and                analyze the data, and additional
adequately supported, calculations are appropriately      supervisory reviews prior to certification
performed, and the certification letter agrees with the   have been added.
supporting schedules.
19. Establish and implement specific procedures           Closed. IRS reported that a rate chart Open. We will follow up on IRS’
requiring that IRS personnel review the distribution      has been developed and verified by the implementation during our fiscal year
rates provided by OTA prior to those rates being used     legal counsels for each of the Form 720 1999 audit.
in the certification of Highway Trust Fund                trust fund agencies. The table is to be
distributions and document evidence of those              reviewed quarterly, used to updateOTA
reviews.                                                  models and monthly transfers, and
                                                          maintained for audit trail purposes.
                                                                                                                                     (continued)




                                                 Page 36                  GAO/AIMD-99-193 IRS Custodial Financial Management Weaknesses
                                                Appendix II
                                                Status of GAO Recommendations on IRS
                                                Custodial Activity




                                                         Status of GAO recommendations
Recommendations                                          reported by IRS in 1999a                  GAO status of recommendations
Internal Revenue Service: Physical Security Over
Taxpayer Receipts and Data Needs Improvement
(GAO/AIMD-99-15, November 30, 1998)
20. Reevaluate the risk classification of all positions Closed. IRS decided on March 24,           Open. IRS did not provide an estimated
in IRS’ Receipt and Control Branch and reclassify       1999, that reevaluation of positions for   completion date for the other security.
such positions where appropriate.                       reclassification was not needed and will   We will continue to monitor progress
                                                        explore other security options.            during fiscal year 1999.
21. Establish procedures to review the applications      Open. IRS plans to re-emphasize           Open. We will follow up on IRS’
and associated documents for all applicants given        procedures and to procure live scan       implementation during our fiscal year
job offers to ensure that fingerprint checks are         fingerprint equipment compatible with     1999 audit.
initiated on those individuals. Implement procedures     FBI’s Integrated Automated Fingerprint
to provide supervisory feedback on these reviews as      Identification System (IAFIS) to be
necessary to ensure personnel staff are aware of         implemented about July 1999. Once
and follow IRS’ policy requiring fingerprint checks.     operational, fingerprint checks are
                                                         expected to be completed in 5 days.
                                                         Also, IRS will review management
                                                         reports and initiate actions to address
                                                         fingerprinting deficiencies.
22. Continue with the agency’s plans to develop and      Open. IRS issued a memorandum on           Open. We will follow up on IRS’
implement a policy to fingerprint filing season          April 30, 1999, to all IRS support offices implementation during our fiscal year
applicants at the earliest possible time in the job      to fingerprint new employees upon          1999 audit.
application process.                                     receipt of an application or upon
                                                         passing written tests. This is to be
                                                         implemented no later than September 1,
                                                         1999.
23. Until the problems with delays in fingerprint        Open. IRS reported it would be unable Open. We will follow up on IRS’
checks are resolved, develop and implement a policy      to comply during the 1999 filing season. implementation during our fiscal year
prohibiting new employees from being assigned to         However, it expects that implementation 1999 audit.
process receipts until the results of fingerprint        of FBI’s IAFIS system in July 1999
checks are received and reviewed by management.          should resolve this problem for future
                                                         filing seasons.
24. Continue the agency’s efforts to explore the         Open. IRS reported it plans to expand Open. We will follow up on IRS’
feasibility of obtaining local police checks on IRS      the local police check capability to other implementation during our fiscal year
applicants and evaluate the efficiency and               facilities and is testing a pilot program to 1999 audit.
effectiveness of the Philadelphia Service Center’s       establish procedures with local police to
electronic fingerprinting system in order to             provide this service.
supplement FBI fingerprint checks.
25. Continue the agency’s efforts to negotiate with      Open. IRS reported it has procured the Open. We will follow up on IRS’
OPM and the FBI and procure the necessary                equipment and delivered it to 17 IRS       implementation during our fiscal year
equipment so that it can participate in FBI’s IAFIS      sites including the 10 service centers. It 1999 audit.
program by August 1999.                                  has requested to be a pilot for IAFIS
                                                         when it comes on-line in summer 1999.
26. Improve the physical security over receipts and      Open. IRS is assessing the space issue Open. We will continue to monitor
returns stored in unsecured overflow areas. These        at its service centers to determine     progress during our fiscal year 1999
controls might include limiting unnecessary traffic by   where the overflow mail can be properly audit.
temporarily designating these overflow areas as          stored and secured. IRS expects to
restricted access areas and/or posting additional        have improved security over overflow
security guards over such areas during the peak          mail by April 2000.
filing season.
                                                                                                                                  (continued)


                          Lte
                            rt                  Page 37                 GAO/AIMD-99-193 IRS Custodial Financial Management Weaknesses
                                                 Appendix II
                                                 Status of GAO Recommendations on IRS
                                                 Custodial Activity




                                                          Status of GAO recommendations
Recommendations                                           reported by IRS in 1999a                   GAO status of recommendations
27. Ensure that all final candling activities are         Open. IRS is working with the service      Open. We will continue to monitor
consistently located in a restricted access area.         centers to assess the space issue and      progress during our fiscal year 1999
                                                          expects to have all final candling         audit.
                                                          activities located in restricted access
                                                          areas by January 2000.
28. Provide secure containers for service center          Closed. In February 1999, IRS issued a Open. We will follow up on IRS’
employees to store “discovered remittances” prior to      memorandum that re-emphasizes           implementation during our fiscal year
inventory and submission to the Receipt and Control       instructions for handling these         1999 audit.
Branch. Immediately upon discovery, the receipts          remittances, including storing
should be recorded into a control log, the receipts       discovered remittances in a secure
secured in a locked container, and the discovered         container and recording the information
receipts reconciled to the control log prior to           on Form 4287, Record of Discovered
submission for processing.                                Remittance.
29. Ensure that all unmatched checks are stored in        Open. IRS is in the process of obtaining Open. We will follow up on IRS’
locked containers until they can be researched and        suitable containers for storing          implementation during our fiscal year
processed for deposit.                                    unmatched checks in service centers by 1999 audit.
                                                          August 1999.
30. Ensure that all returned refund checks are            Closed. IRS issued a supplemental      Open. We will follow up on IRS’
stamped “non-negotiable” as soon as they are              procedure to reinforce overstamping of implementation during our fiscal year
extracted.                                                returned refund checks as soon as they 1999 audit.
                                                          are extracted.
31. Require district office employees to store walk-in    Closed. In November 1998, IRS issued Open. We will follow up on IRS’
payments in secure containers in accordance with          new guidelines for safeguarding receipts implementation during our fiscal year
IRM 1(16) 41, section 500. District office                of cash and noncash payments received 1999 audit.
management should ensure that this policy is              in walk-in facilities.
followed and should limit the number of employees
with access to the keys or combinations to these
containers.
32. Ensure that walk-in payment receipts are              Closed. IRS issued new guidelines for      Open. We will follow up on IRS’
recorded in a control log prior to depositing the         recording and reconciling receipts.        implementation during our fiscal year
receipts in the locked container and ensure that the                                                 1999 audit.
control log information is reconciled to receipts prior
to submission of the receipts to another unit for
payment processing. To ensure proper segregation
of duties, an employee not responsible for logging
receipts in the control log should perform the
reconciliation.
33. Study the feasibility of improving security for       Open. IRS issued a directive in April      Open. We will continue to monitor
deposits in transit. In conducting this study, IRS        1999 that required couriers to be          progress during our fiscal year 1999
should consider a number of alternatives including        bonded and use locked, enclosed            audit.
the use of depositories in close proximity to its         vehicles. IRS reported it is also
various field locations and employing security guards     upgrading service center requirements
to accompany couriers to the depositories.                to include the use of armed couriers,
                                                          and plans to have all field offices send
                                                          tax receipts by overnight mail to
                                                          designated service centers by August
                                                          1999. It has also initiated a study to
                                                          investigate other alternatives for
                                                          transporting deposits.

                                                                                                                                   (continued)


                                                 Page 38                  GAO/AIMD-99-193 IRS Custodial Financial Management Weaknesses
                                                 Appendix II
                                                 Status of GAO Recommendations on IRS
                                                 Custodial Activity




                                                         Status of GAO recommendations
Recommendations                                          reported by IRS in 1999a                     GAO status of recommendations
34. Develop a policy to ensure that contracts related    Open. Once the study on transporting Open. We will continue to monitor
to courier services do not unduly expose the             deposits is completed, IRS plans to     progress during our fiscal year 1999
government to losses in the event of lost, stolen, or    develop a policy. Implementation of the audit.
damaged deposits in transit.                             contractor’s findings is scheduled for
                                                         August 1999.
35. Ensure that courier access is limited to service     Open. IRS reported it is working to          Open. No time frames have been
center premises. Deposit Unit employees should           determine the best solution to this issue.   established for what corrective action
deliver the deposits to couriers waiting at the guard                                                 will be taken and when this effort might
station instead of providing courier badges allowing                                                  be completed.
them unnecessary service center access.
                                                 a
                                                  The “Status of GAO Recommendations Reported by IRS in 1999” is based primarily upon the
                                                 following IRS documents: Action Plan for GAO Recommendations, January 8, 1999, and two letters to
                                                 Congress dated January 29, 1999, and February 25, 1999, laying out IRS’ response to each of the
                                                 recommendations in GAO/AIMD-99-15 and GAO/AIMD-99-17, respectively.




Table II.3: Seven Recommendations on IRS Custodial Financial Management in This Report

                                                           Status of GAO recommendations
Recommendations                                            reported by IRS in 1999a                    GAO status of recommendations
Internal Revenue Service: Custodial Financial
Management Weaknesses (GAO/AIMD-99-193,
August 4, 1999)
36. Analyze and determine the factors causing delays Not applicable–new recommendation.                New recommendation.
in processing and posting trust fund recovery penalty
assessments. Once these factors have been
determined, IRS should develop procedures to
reduce the impact of these factors and to ensure
timely posting to all applicable accounts and proper
offsetting of refunds against unpaid TFRP
assessments before issuance.
37. Identify and institute procedures to monitor           Not applicable–new recommendation.          New recommendation.
compliance of installment agreements. Such
monitoring should ensure that the installment
agreements provide for full payment of the taxes
owed. For example, management could randomly
select installment agreements from all of its units to
review for compliance with the Internal Revenue
Code.
                                                                                                                                      (continued)




                                                 Page 39                 GAO/AIMD-99-193 IRS Custodial Financial Management Weaknesses
                                              Appendix II
                                              Status of GAO Recommendations on IRS
                                              Custodial Activity




                                                        Status of GAO recommendations
Recommendations                                         reported by IRS in 1999a                    GAO status of recommendations
38. Expand IRS’ current review of service center          Not applicable–new recommendation.        New recommendation.
deterrent controls to include similar reviews of
controls at IRS district offices and post-of-duty offices
in areas such as courier security, safeguarding of
receipts in locked containers, requirements for
fingerprinting employees, and requirements for
promptly over-stamping checks made out to “IRS”
with “Internal Revenue Service” or “United States
Treasury”. Based on the results, IRS should make
appropriate changes to strengthen its controls at
these locations.
39. IRS should work withTreasury’s Financial            Not applicable–new recommendation.          New recommendation.
Management Service (FMS) to revise the current
lockbox contracts to specifically require that:
• background checks be completed before employees
  begin working,
• temporary employees be subjected to background
  checks that are consistent with those required of
  IRS employees, and
• taxpayer data and receipts in transit to and from the
  lockbox banks are appropriately protected.
40. Require service center staff to provide receipts to Not applicable–new recommendation.          New recommendation.
all walk-in taxpayers regardless of the method of
payment. In addition, IRS should post signs
reminding taxpayers to request receipts. At service
centers not normally equipped to receive walk-in
payments, all receipts should be logged in to ensure
completeness and accuracy of receipts and deposits.
41. Establish procedures to ensure the prompt           Not applicable–new recommendation.          Not applicable–new recommendation.
recording of tax returns. IRS should implement
controls to ensure that excise tax returns are
recorded timely and included in the quarterly excise
tax trust fund certifications.
42. Ensure that additional staff are employed and        Not applicable–new recommendation.         New recommendation.
existing staff appropriately cross-trained to be able to
perform the master file extractions and other ad hoc
procedures needed for IRS to develop reliable
balances for financial reporting purposes on a
continuing basis.
                                              a
                                               The “Status of GAO Recommendations Reported by IRS in 1999” is based primarily upon the
                                              following IRS documents: Action Plan for GAO Recommendations, January 8, 1999, and two letters to
                                              Congress dated January 29, 1999, and February 25, 1999, laying out IRS’ response to each of the
                                              recommendations in GAO/AIMD-99-15 and GAO/AIMD-99-17, respectively.




                                              Page 40                 GAO/AIMD-99-193 IRS Custodial Financial Management Weaknesses
Appendix III

Comments From the Internal Revenue Service                                           AppeInx
                                                                                           Idi




               Page 41   GAO/AIMD-99-193 IRS Custodial Financial Management Weaknesses
Appendix III
Comments From the Internal Revenue
Service




Page 42              GAO/AIMD-99-193 IRS Custodial Financial Management Weaknesses
Appendix IV

GAO Contacts and Staff Acknowledgements                                                           Appenx
                                                                                                       IV
                                                                                                        di




GAO Contacts       Steven J. Sebastian (202) 512-3406
                   Doreen Eng (206) 287-4858



Acknowledgements   In addition to those named above, the following individuals made key
                   contributions to this report: Julianne Hartman Cutts, Catherine W. Arnold,
                   Stan Stenerson, and Charles R. Fox.




                   Page 43            GAO/AIMD-99-193 IRS Custodial Financial Management Weaknesses
Page 44   GAO/AIMD-99-193 IRS Custodial Financial Management Weaknesses
Page 45   GAO/AIMD-99-193 IRS Custodial Financial Management Weaknesses
Page 46   GAO/AIMD-99-193 IRS Custodial Financial Management Weaknesses
Related GAO Products


               Internal Revenue Service: Results of Fiscal Year 1998 Financial Statement
               Audit (GAO/T-AIMD-99-103, March 1, 1999).

               Financial Audit: IRS’ Fiscal Year 1998 Financial Statements
               (GAO/AIMD-99-75, March 1, 1999).

               IRS Systems Security: Although Significant Improvements Made, Tax
               Processing Operations and Data Still at Serious Risk (GAO/AIMD-99-38,
               December 14, 1998).

               Internal Revenue Service: Physical Security Over Taxpayer Receipts and
               Data Needs Improvement (GAO/AIMD-99-15, November 30, 1998).

               Excise Taxes: Internal Control Weaknesses Affect Accuracy of
               Distributions to the Trust Funds (GAO/AIMD-99-17, November 9, 1998).

               Internal Revenue Service: Immediate and Long-Term Actions Needed to
               Improve Financial Management (GAO/AIMD-99-16, October 30, 1998).

               Internal Revenue Service: Composition and Collectibility of Unpaid
               Assessments (GAO/AIMD-99-12, October 29, 1998).

               Internal Revenue Service: Remaining Challenges to Achieve Lasting
               Financial Management Improvements (GAO/T-AIMD/GGD-98-139, April 15,
               1998).

               Financial Audit: Examination of IRS' Fiscal Year 1997 Custodial Financial
               Statements (GAO/AIMD-98-77, February 26, 1998).

               Tax Systems Modernization: Blueprint Is a Good Start But Not Yet
               Sufficiently Complete to Build or Acquire Systems (GAO/AIMD/GGD-98-54,
               February 24, 1998).

               Financial Audit: Examination of IRS' Fiscal Year 1996 Custodial Financial
               Statements (GAO/AIMD-98-18, December 24, 1997).

               Financial Audit: Examination of IRS' Fiscal Year 1995 Financial Statements
               (GAO/AIMD-96-101, July 11, 1996).

               Financial Audit: Examination of IRS' Fiscal Year 1994 Financial Statements
               (GAO/AIMD-95-141, August 4, 1995).




       Leter   Page 47           GAO/AIMD-99-193 IRS Custodial Financial Management Weaknesses
                   Related GAO Products




                   Financial Audit: Examination of IRS' Fiscal Year 1993 Financial Statements
                   (GAO/AIMD-94-120, June 15, 1994).

                   Financial Management: Important IRS Revenue Information is Unavailable
                   or Unreliable (GAO/AIMD-94-22, December 21, 1993).

                   Financial Audit: Examination of IRS' Fiscal Year 1992 Financial Statements
                   (GAO/AFMD-93-2, June 30, 1993).

                   Financial Audit: IRS Significantly Overstated its Accounts Receivable
                   Balance (GAO/AFMD-93-42, May 6, 1993).

                   Federal Tax Deposit System: IRS Can Improve the Federal Tax Deposit
                   System (GAO/AFMD-93-40, April 28, 1993).




(919354)   Leter   Page 48                GAO/AIMD-99-193 IRS Custodial Financial Management Weaknesses
Ordering Information

The first copy of each GAO report and testimony is free.
Additional copies are $2 each. Orders should be sent to the
following address, accompanied by a check or money order made
out to the Superintendent of Documents, when necessary, VISA and
MasterCard credit cards are accepted, also.

Orders for 100 or more copies to be mailed to a single address are
discounted 25 percent.

Orders by mail:

U.S. General Accounting Office
P.O. Box 37050
Washington, DC 20013

or visit:

Room 1100
700 4th St. NW (corner of 4th and G Sts. NW)
U.S. General Accounting Office
Washington, DC

Orders may also be placed by calling (202) 512-6000
or by using fax number (202) 512-6061, or TDD (202) 512-2537.

Each day, GAO issues a list of newly available reports and
testimony. To receive facsimile copies of the daily list or any list
from the past 30 days, please call (202) 512-6000 using a touchtone
phone. A recorded menu will provide information on how to obtain
these lists.

For information on how to access GAO reports on the INTERNET,
send an e-mail message with “info” in the body to:

info@www.gao.gov

or visit GAO’s World Wide Web Home Page at:

http://www.gao.gov
United States                       Bulk Rate
General Accounting Office      Postage & Fees Paid
Washington, D.C. 20548-0001           GAO
                                 Permit No. GI00
Official Business
Penalty for Private Use $300

Address Correction Requested