oversight

Major Management Challenges and Program Risks: Department of the Treasury

Published by the Government Accountability Office on 2003-01-01.

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

               United States General Accounting Office

GAO            Performance and Accountability Series




January 2003
               Major Management
               Challenges and
               Program Risks
               Department of the
               Treasury




GAO-03-109
               a
A Glance at the Agency Covered in This Report
The Department of the Treasury is responsible for a broad scope of activities that
touch the lives of all Americans, including
●    collecting taxes to finance government operations;
●    managing the government’s finances; and
●    carrying out law enforcement activities, such as securing U.S. borders and
     adding to homeland security, controlling firearms-related crime, and managing
     seized assets.1


The Department of the Treasury’s Budgetary and Staff Resources


Budgetary Resources a,b                                              Staff Resources b
Dollars in billions                                                  FTEs in thousands

120                                                                  200

                                                  97                                                                  151
    90              88                  86                           150              144       144       145
          83                  84                                             142


    60                                                               100



    30                                                                50


     0                                                                 0
         1998     1999      2000       2001       2002                      1998      1999      2000     2001         2002
         Fiscal year                                                        Fiscal year
Source: Budget of the United States Government.

a Budgetary resources include new budget authority (BA) and unobligated balances of previous BA. Interest on the
    debt is not included.
b Budget and staff resources are actuals for FY 1998-2001. FY 2002 are estimates from the FY 2003 budget, which
    are the latest publicly available figures on a consistent basis as of January 2003. Actuals for FY 2002 will be
    contained in the President’s FY 2004 budget to be released in February 2003.




This Series
This report is part of a special GAO series, first issued in 1999 and updated in
2001, entitled the Performance and Accountability Series: Major Management
Challenges and Program Risks. The 2003 Performance and Accountability Series
contains separate reports covering each cabinet department, most major
independent agencies, and the U.S. Postal Service. The series also includes a
governmentwide perspective on transforming the way the government does
business in order to meet 21st century challenges and address long-term fiscal
needs. The companion 2003 High-Risk Series: An Update identifies areas at high
risk due to either their greater vulnerabilities to waste, fraud, abuse, and
mismanagement or major challenges associated with their economy, efficiency, or
effectiveness. A list of all of the reports in this series is included at the end of
this report.

1
    Certain law enforcement activities of Treasury are transferring to the new Department of Homeland Security and
    to the Department of Justice.
                                                    January 2003


                                                    PERFORMANCE AND ACCOUNTABILITY SERIES

                                                    Department of the Treasury
Highlights of GAO-03-109, a report to
Congress included as part of GAO’s
Performance and Accountability Series




In its 2001 performance and                         The Department of the Treasury (Treasury) helps promote a stable economy,
accountability report on the                        manages the government’s finances, and safeguards federal financial systems
Department of the Treasury, GAO                     and our nation’s leaders. Given these multiple missions, Treasury and its
identified important tax systems                    components confront several performance and accountability challenges.
modernization, border security,
trade regulation, financial
management, and other issues                        •   Internal Revenue Service (IRS): IRS is now halfway through a
facing the department. The                              10-year modernization effort to improve taxpayer service and better
information GAO presents in this                        ensure compliance. IRS has made progress in laying a management
report is intended to help to sustain                   foundation to improve its performance, including reorganizing into
congressional attention and a                           customer-focused operating divisions, bringing new computer systems on-
departmental focus on continuing                        line, and producing reliable year-end financial statements. However, IRS
to make progress in addressing                          still faces challenges in improving compliance and collection, deploying
these challenges and ultimately                         major business systems, implementing new performance measures,
overcoming them. This report is                         developing reliable cost-based performance information, and securing its
part of a special series of reports                     computer systems.
on governmentwide and agency-
specific issues.
                                                    •   U.S. Customs Service: In the aftermath of the 9/11 terrorist attacks,
                                                        recent legislation established a new Department of Homeland Security that
                                                        will absorb Customs. Regardless of this change, Customs is challenged to
•    IRS: Continue efforts to                           safeguard U.S. borders against the illegal entry of goods, including
     improve service, ensure                            weapons of mass destruction, while efficiently regulating legitimate
     compliance, maintain                               commercial activity. While some of Customs’s work to address these
     comparable performance                             challenges cannot be discussed in this report due to its sensitive nature,
     measures, manage systems                           two challenges Customs is working on include enhancing its trade
     modernization, and implement                       compliance program and acquiring a new trade system.
     effective computer security.

•    Customs: Enhance evolving                      •   Financial Management: Treasury faces many challenges in improving its
     trade compliance program and                       financial management systems and correcting internal control weaknesses,
     implement new trade system                         particularly at IRS and Customs. As the government’s fiscal agent,
     through continuous                                 Treasury is also challenged to prepare reliable financial statements for the
     improvement and effective                          U.S. government, improve debt collection, and strengthen computer
     resource management.                               security controls at its Financial Management Service. Both the Treasury
                                                        Department and IRS issued audited financial statements 6 weeks after the
•    Financial Management:                              end of fiscal year 2002.
     Improve bureau operations,
     strengthen internal controls,
     ensure compliance with a key
     law, continue to improve debt
     collection, and strengthen
     computer security.


www.gao.gov/cgi-bin/getrpt?GAO-03-109.

To view the full report, click on the link above.
For more information, contact Norm Rabkin
at (202) 512-9110 or rabkinn@gao.gov.
Contents



Transmittal Letter                                                                                                 1


Major Performance                                                                                                  2

and Accountability
Challenges

GAO Contacts                                                                                                      37


Related GAO Products                                                                                              38


Performance and                                                                                                   42
Accountability and
High-Risk Series




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                       Page i                                                    GAO-03-109 Treasury Challenges
A
United States General Accounting Office
Washington, D.C. 20548
                                                                                           Comptroller General
                                                                                           of the United States




           January 2003                                                                                             T
                                                                                                                    ransmL
                                                                                                                         ta
                                                                                                                          ileter




           The President of the Senate
           The Speaker of the House of Representatives

           This report addresses the major management challenges facing the Department of the Treasury
           (Treasury) as it seeks to carry out certain aspects of its economic, financial, enforcement, and
           management missions. It is part of a special series GAO has issued biennially since January 1999,
           entitled the Performance and Accountability Series: Major Management Challenges and Program
           Risks. This report discusses the actions Treasury has taken and that are under way to address the
           challenges GAO reported in its series 2 years ago, in January 2001, and major events that have
           occurred that significantly influence the environment in which the department carries out its mission.
           Also, GAO summarizes the challenges that remain and further actions that GAO believes are needed.

           This analysis should help the new Congress and the administration carry out their responsibilities and
           improve government for the benefit of the American people. For additional information about this
           report, please contact Norm Rabkin, Managing Director, Tax Administration and Justice, at
           (202) 512-9110 or at rabkinn@gao.gov.




           David M. Walker
           Comptroller General
           of the United States




                                     Page 1                                           GAO-03-109 Treasury Challenges
Major Performance and Accountability
Challenges

              According to its mission statement, the Department of the Treasury
              (Treasury) promotes prosperous and stable domestic and international
              economies; manages the government’s finances; and safeguards our
              financial systems, protects our nation’s leaders, and secures a safe and
              drug-free America. With a fiscal year 2002 budget of $16.4 billion in
              discretionary spending and a staff of about 150,000, Treasury’s
              responsibilities are divided among 12 major components, including the
              Internal Revenue Service (IRS); Bureau of Alcohol, Tobacco, and Firearms
              (ATF); Financial Management Service (FMS); U.S. Customs Service
              (Customs); and U.S. Secret Service.1 In helping Treasury meet its overall
              mission, these components confront several major performance and
              accountability challenges.

              In our last report of January 2001, we identified five major performance
              and accountability challenges for Treasury and its components.2 These
              included (1) modernizing the IRS to better help taxpayers meet their tax
              responsibilities and increase overall compliance with tax laws,
              (2) improving Customs’s regulation of commercial trade while ensuring
              protection against the entry of illegal goods at U.S. borders, (3) achieving
              sound financial management through sustained management attention and
              priority, (4) developing measurable performance targets to assess ATF’s
              progress in reducing criminals’ access to firearms, and (5) improving asset
              forfeiture program management and accountability. We noted the specific
              steps Treasury had taken to address the challenges, while pointing out
              areas in which Treasury had not made enough progress.

              Since Treasury has made significant progress on two of the five challenges
              identified in our last report—ATF performance targets and asset forfeiture
              program management—we have removed these from consideration in this
              report.3 The other three challenges, however, continue to confront


              1
                Certain Treasury law enforcement activities, including those of Customs and the Secret
              Service, are transferring to the new Department of Homeland Security, which was created
              by the Homeland Security Act of 2002, P.L. 107-296. In addition, ATF is transferring to the
              Department of Justice, with the exception of certain functions relating to the regulation and
              taxation of the alcohol and tobacco industries.
              2
                U.S. General Accounting Office, Performance and Accountability Series: Major
              Management Challenges and Program Risks: Department of the Treasury, GAO-01-254
              (Washington, D.C.: Jan. 2001).
              3
                We also removed the high-risk designation of Justice’s and Treasury’s asset forfeiture
              programs, as discussed in our 2003 High-Risk Series: An Update, GAO-03-119.




              Page 2                                                      GAO-03-109 Treasury Challenges
                          Major Performance and Accountability
                          Challenges




                          Treasury—IRS modernization, Customs regulation of commercial trade,
                          and Treasury financial management. Addressing these three challenges will
                          require sustained managerial attention and commitment, as well as
                          oversight and evaluations from independent organizations.




                               Performance and
                               Accountability Challenges
                                   Modernize IRS to better help taxpayers meet their tax responsibilities and to
                                   increase overall compliance with tax laws

                                   Improve Customs's regulation of commercial trade while ensuring protection
                                   against the entry of illegal goods at U.S. borders

                                   Achieve sound financial management through sustained management attention
                                   and priority




Modernize IRS to          IRS has now invested 5 years in a modernization effort intended to improve
                          service to taxpayers and better ensure taxpayer compliance with the tax
Better Help Taxpayers     laws. This is half way through the 10 years IRS estimated would be needed.
Meet Their Tax            So far, IRS has made important progress at laying the management
                          foundation for a more modern agency that is able to respond to taxpayer
Responsibilities and to   needs faster, more accurately, and at a lower cost. However, at this time,
Increase Overall          neither the foundation nor the structure—the reengineered processes that
Compliance with Tax       would deliver better service and improve compliance—is complete. IRS
                          must successfully manage several significant challenges that threaten
Laws                      continued modernization. Challenges include reversing the decline in
                          compliance and collection programs, managing the deployment of several
                          large business systems, and implementing new performance measures and
                          management processes.




                          Page 3                                                      GAO-03-109 Treasury Challenges
Major Performance and Accountability
Challenges




IRS’s modernization strategy encompasses five components—business
practices, agency organization, performance measurement, managerial
accountability, and new technology. As shown in figure 1, the components
are the foundation for a modern agency that can achieve its goals of
providing better service and ensuring compliance while using resources
productively. The components are interrelated; for example, new
technology will support revamped practices, and performance measures
will be used to ensure accountability. Each component, by itself, is a major
effort. Because the components are interrelated, IRS must make progress
on all of the components in a coordinated fashion. For these reasons, IRS’s
modernization effort is ambitious and complex.



Figure 1: Overview of IRS’s Modernization Program

                                             Mission statement


                      Provide America's taxpayers top-quality service by
                       helping them understand and meet their tax responsibilities and
                       applying the tax law with integrity and fairness to all


                                                     Goals


               Top-quality service to each taxpayer in every interaction
               Top-quality service to all taxpayers through fair and uniform application of the law
               Productivity through a quality work environment


                                          Modernization components



  Revamped                  Customer-            Management             Balanced
   business                  focused               roles with          measurement                New
   practices                operating                 clear                 of                 technology
                             divisions           responsibility        performance

Source: IRS.



IRS has made important progress in developing and implementing the five
components of modernization. However, continued progress depends on
meeting a number of challenges. Table 1 summarizes the progress IRS has
made on the five modernization components and identifies seven major
challenges associated with three of the components.


Page 4                                                                 GAO-03-109 Treasury Challenges
                                               Major Performance and Accountability
                                               Challenges




Table 1: Summary of IRS’s Modernization Accomplishments and Challenges

Modernization component        Major accomplishments                                     Challenges remaining
Customer focused operating     • Reorganized into four operating divisions, each
divisions                        responsible for a group of taxpayers with similar
                                 needs (FY2001)
Management roles with clear    • Implemented new strategic planning, budgeting, and
responsibility                   performance management system
                               • Assigned responsibility for improvement projects
                               • Redirected almost 2,300 staff positions toward higher
                                 priorities
Revamped business              • Brought new systems on-line, including telephone call • Improving service to taxpayers
practices                        routing and data support systems                        • Collecting taxes that are due the government
                               • Initiated efforts to reengineer major business systems,   but not voluntarily paid by taxpayers
                                 including examination and collection programs           • Making appropriate payments to taxpayers
                                                                                           claiming the earned income credit
Balanced measurement of        • Established an evaluation system for frontline      • Establishing measures comparable over time
performance                      employees aligned with service and compliance goals and collecting sufficient performance data
                               • Initiated program to measure voluntary compliance   • Addressing financial management
                                 rate                                                  weaknesses to develop reliable cost-based
                               • Produced reliable year-end financial statements       performance information
New technology                 • Adopted GAO recommendations regarding                   • Managing the Business Systems
                                 management controls for information systems               Modernization program
                                 acquisition and implementation                          • Implementing effective computer security
                               • Continued toward fully implementing complex
                                 information systems and bringing more limited
                                 systems on-line
Source: GAO analysis of IRS.


                                               As already noted, the components of IRS’s modernization effort are
                                               interrelated, and consequently, the seven challenges are interrelated.
                                               Maximum progress on modernization will only be made if IRS
                                               simultaneously and successfully deals with all seven challenges.



Improving Service to                           Improving service to taxpayers remains a challenge for IRS. The progress
Taxpayers                                      that IRS has made to date in modernizing has, as noted, laid a foundation
                                               for improvement but has not yet provided the quality of service that
                                               taxpayers, Congress, and IRS management agree is needed.

                                               Providing good service to taxpayers by making it as easy as possible for
                                               them to understand and meet their tax obligations could improve voluntary
                                               compliance—payments and tax returns filed without IRS audit and
                                               collection action—and reduce the need for these intrusive and costly
                                               enforcement activities. A major principle of IRS’s modernization effort is



                                               Page 5                                                     GAO-03-109 Treasury Challenges
Major Performance and Accountability
Challenges




that understanding the taxpayer’s point of view and improving service is
fundamental to helping the majority of taxpayers who are willing to comply
with the tax laws and pay what they owe. A related principle is that
preventing compliance problems by educating and informing taxpayers, or
helping taxpayers resolve problems early on, is less expensive and time
consuming for both IRS and the taxpayer than enforcement action taken
later. Facilitating voluntary compliance is especially important because the
U.S. tax system relies on it. As shown in figure 2, almost all tax revenue
that is collected is paid through withholding, remittances sent with tax
returns, or other forms of payment, without any IRS enforcement action.



Figure 2: Tax Revenue Collected through Voluntary Payments or IRS Enforcement
Action

                                         2%
                                         Tax revenue collected by IRS
                                         enforcement activities




                                         Tax revenue collected through
                 98%                     voluntary payment




Source: IRS.



Table 2 shows the recent improvement in selected aspects of taxpayer
service, as well as the level of current service. Taxpayers still have
difficultly reaching IRS and, when they do get through, they may not be
able to rely on the accuracy of the information IRS provides. For example,
the percentage of phone calls to assistors that received service increased to
71 percent in the 2002 tax filing season, yet the remaining 29 percent
attempting to reach an assistor hung up or were disconnected without
receiving service. IRS officials credited the 2002 filing season improvement
to, among other efforts, call routing system improvements. Treasury
Inspector General for Tax Administration (TIGTA) data suggest that the tax



Page 6                                             GAO-03-109 Treasury Challenges
Major Performance and Accountability
Challenges




law information IRS provided at walk-in locations improved from 2001 to
2002, despite a lack of comparable data. Nonetheless, in 2002, the tax law
information provided was incorrect 50 percent of the time.



Table 2: Selected Performance Measures of IRS Telephone and Walk-in Assistance
in the Tax Filing Season

                                                            2000                2001              2002
Telephone accessibility measures
    CSR level of servicea                                   61%                 68%               71%
Telephone accuracy measures
    Tax law correct response rateb                         N/A c        79% +/- 1% 85% +/- 1%
Walk-in accuracy measures
    Tax law correct answers rated                           N/A c               N/A c             50%
Source: IRS and TIGTA.
a
 The percentage of calls that IRS estimates were from callers attempting to reach an assistor, also
called a customer service representative (CSR), that received service, including some calls answered
through automation, from January through mid-July.
b
 Estimate of the percentage of calls in which assistors provided correct responses from January
through June.
c
 Comparable data is not available.
d
 The percentage of questions that were answered correctly in test walk-in contacts from January
through April.


Part of what makes improving service such a challenge is the volume of
requests for taxpayer assistance. For example, IRS data indicates that in
the 2002 filing season, taxpayers called IRS about 100 million times, with an
estimated 30 million of those calls to an assistor, as opposed to IRS’s
automated services. IRS had about 10,000 assistors on board to answer
those calls.

A common theme in our recent reports on taxpayer service is the need for
improved management of IRS’s service functions, such as telephone
assistance. Specifically, we have recommended explicit goal setting,
improved performance measures, and more program evaluation. Such
practices would enable IRS managers and frontline staff to better
understand what they are trying to accomplish, how their actual
performance compares to their objectives, and the reasons for any gaps.
Armed with such information, IRS managers would be better positioned to
make decisions regarding improvement actions.




Page 7                                                           GAO-03-109 Treasury Challenges
Major Performance and Accountability
Challenges




Another related theme is the need for improved human capital
management. We have recognized that IRS’s new performance
management system could be a powerful tool to help IRS achieve its
mission, and that system weaknesses could make it less effective in
ensuring that employees at every level of the organization are working
toward common goals. For telephone performance, we have called for
systems and evaluations to identify gaps in assistors’ skills, meet training
needs to fill those gaps, monitor and address the causes of attrition, and
ensure that human capital management practices help IRS achieve
taxpayer service goals.

IRS has generally agreed with our recommendations and has taken action
to implement them. For example, more focus is being placed on long-term
goals in planning documents. However, management improvements will
have to be sustained over time so taxpayers can see benefits in the form of
improved service.

In addition to the challenge of making changes that achieve long-term
improvements, revamping taxpayer service will require that IRS
simultaneously meet the other significant management challenges
discussed in this report. For example, to ensure that changes result in
efficient, improved service, IRS will need to establish comparable
measures over time, collect sufficient data to identify ways to improve
service, and develop cost-based performance information to identify the
costs of achieving improved results.




Page 8                                            GAO-03-109 Treasury Challenges
                             Major Performance and Accountability
                             Challenges




Collection of Unpaid Taxes   Collecting taxes due the government4 has always been a challenge for IRS,
                             but in recent years the challenge has grown. In testimonies and reports we
                             have highlighted large and pervasive declines in IRS’s compliance and
                             collections programs. For example, between 1996 and 2001 the programs
                             generally experienced larger workloads, less staffing, and fewer numbers
                             of cases closed per employee. By the end of fiscal year 2001, IRS was
                             deferring collection action on about one out of every three tax
                             delinquencies assigned to the collections programs. As of September 30,
                             2002, IRS had an inventory of known unpaid taxes, including interest and
                             penalties, totaling $249 billion, of which $112 billion has some collection
                             potential and, thus, is at risk.5

                             To reverse these trends, IRS is in various stages of planning and
                             implementing management improvements, including reengineering
                             compliance and collection practices, collecting better data about
                             noncompliance, and investing in modern financial and information
                             systems. Because of the magnitude of these efforts, the collection of
                             unpaid taxes is a major management challenge. Because of the potential
                             revenue losses and the threat to voluntary compliance this is also a high-
                             risk area.

                             Many view a visible enforcement program as critical for our tax system.
                             While improving taxpayer service may enhance voluntary compliance,
                             taxpayers’ willingness to voluntarily comply with the tax laws depends in
                             part on their having confidence that their friends, neighbors, and business
                             competitors are paying their fair share of taxes. To provide that
                             confidence, IRS operates a number of compliance and collection programs,
                             including computerized checks for nonfiling and underreported income,
                             audits, and telephone and field collections.




                             4
                               Total unpaid taxes due the government include (1) delinquent taxes that IRS is attempting
                             to collect, (2) taxes that IRS knows are due but it has decided not to pursue collecting, and
                             (3) an unknown amount of unpaid taxes that IRS has not identified.
                             5
                               Known unpaid taxes consist of (1) taxes due from taxpayers for which IRS can support the
                             existence of a receivable through taxpayer agreement or a favorable court ruling (federal
                             taxes receivable); (2) compliance assessments, in which neither the taxpayer nor the court
                             has affirmed that the amounts are owed; and (3) write-offs, which represent unpaid
                             assessments for which IRS does not expect further collections due to such factors as the
                             taxpayer’s death, bankruptcy, or insolvency. The $112 billion represents only the first two
                             categories.




                             Page 9                                                      GAO-03-109 Treasury Challenges
Major Performance and Accountability
Challenges




For the last several years, Congress and others have been concerned that
the declines in IRS’s compliance and collections programs are eroding
taxpayers’ confidence in the fairness of our tax system. Indeed, in May
2002 congressional hearings, the IRS Commissioner said that IRS was not
providing taxpayers with adequate assurance that their neighbors or
competitors were complying with the tax laws and paying what they owed.6

IRS’s strategy to reverse the compliance and collection program declines is
ambitious and, therefore, challenging. Generally, the strategy intends to
improve the productivity of IRS’s existing compliance and collections staff
and better target noncompliance. By reengineering the compliance and
collections programs (and augmenting the programs with staff freed up
elsewhere in IRS), IRS hopes to significantly increase its compliance and
collections efforts. The reengineering efforts rely heavily on technology
modernization, which is also a high-risk management challenge.

Better targeting of noncompliance requires better information. IRS’s new
effort to review compliance, the National Research Program (NRP),
should, if implemented as planned, provide IRS with the first up-to-date
information on compliance rates and sources of noncompliance since it
last measured the compliance rate using 1988 tax returns. Such
information could be another input into IRS’s strategic planning, budgeting,
and performance management process and used to set agency priorities
and allocate resources. However, we remain concerned about IRS’s ability
to appropriately allocate its enforcement resources, including staff, to its
various compliance and collections activities. For example, as we have
reported, 7 IRS has not been able to readily determine the full cost of its
various programs and activities. Without this information, IRS cannot
perform cost-benefit analyses to ascertain whether the resources it has
devoted to compliance programs were appropriate relative to costs and
potential benefits.

IRS has agreed with the recommendations we made regarding
implementation of NRP and more effective use of data in the strategic
planning, budgeting, and performance management process. IRS has also


6
  Internal Revenue Service: Statement of Charles O. Rossotti before the Annual RRA’98
Joint Hearing on IRS Progress Convened by the Joint Committee on Taxation (IRS Doc
2002-11707, May 14, 2002).
7
  U.S. General Accounting Office, Financial Audit: IRS’s Fiscal Years 2002 and 2001
Financial Statements, GAO-03-243 (Washington, D.C.: Nov. 15, 2002).




Page 10                                                  GAO-03-109 Treasury Challenges
                       Major Performance and Accountability
                       Challenges




                       agreed with us about the need for better cost data on its enforcement
                       activities and has been developing a centralized cost accounting system
                       expected to be deployed in late 2003. Successfully completing these
                       actions will be a challenge. However, implementation should provide IRS
                       managers with better information about how to effectively and efficiently
                       target noncompliance.

                       While our reports on the collection of unpaid taxes have focused on the
                       efficiency with which existing compliance and collections resources are
                       used, the IRS Commissioner has raised the issue of whether the existing
                       resources, even if used efficiently, can provide an adequate level of
                       enforcement. In a September 2002 report to the IRS Oversight Board, the
                       Commissioner said that IRS has been facing a growing compliance
                       workload at the same time that resources were declining. He said the
                       result is a “huge gap” between the number of taxpayers who are not filing,
                       not reporting, or not paying what they owe and IRS’s capacity to deal with
                       them. Whether the Commissioner is correct about the magnitude of this
                       problem depends in part on policy makers’ judgments about how large an
                       enforcement presence IRS needs to provide taxpayers with confidence that
                       all taxpayers are paying their fair share of taxes.



Earned Income Credit   In addition to collecting taxes, IRS is also responsible for administering tax
Noncompliance          code provisions that make financial assistance available to the working
                       poor. Under the code, taxpayers who meet earned income, family size, and
                       other requirements are authorized to claim the earned income credit. The
                       credit offsets the impact of the social security taxes paid by low-income
                       workers and is intended to encourage low-income persons to seek work
                       rather than welfare. For most recipients, the credit amount exceeds the
                       amount of their income tax liability; in such cases, because the credit is
                       refundable, the taxpayers receive a refund.

                       There are significant compliance problems associated with the earned
                       income credit that have led us to list IRS’s administration of the credit as a
                       high-risk area for the federal government. IRS estimates that of the
                       $31.3 billion in earned income credits claimed by taxpayers in tax year
                       1999, about $8.5 to $9.9 billion should not have been paid. 8 This level of
                       noncompliance has remained relatively unchanged even after a 5-year


                       8
                           IRS estimated that $1.2 billion would be recovered as a result of enforcement efforts.




                       Page 11                                                       GAO-03-109 Treasury Challenges
                           Major Performance and Accountability
                           Challenges




                           effort to reduce it. Because IRS has struggled to reduce the overclaim rate
                           and because of the magnitude of the financial risk, earned income credit
                           noncompliance has been and remains both a management challenge and a
                           high-risk area.

                           The design of the earned income credit may contribute to noncompliance.
                           As we have reported,9 certain features of the credit represent a trade-off
                           between compliance and other desired goals. Unlike other income transfer
                           programs, such as Temporary Assistance for Needy Families and Food
                           Stamps, the earned income credit was designed to be administered through
                           the tax system. Accordingly, while the other programs have staff that
                           review documents and other evidence before judging applicants to be
                           qualified to receive assistance, administration of the credit relies more
                           directly on the self-reported qualifications of individuals. This approach
                           generally should result in lower administrative costs and possibly higher
                           participation rates for the credit than other assistance programs. However,
                           earned income credit noncompliance may also be higher.

                           IRS has to balance its efforts to combat noncompliance with its efforts to
                           help ensure that qualified persons claim the credit. With the data available,
                           we were able to estimate that for every three households that claimed the
                           credit, there was an additional eligible household that did not.10

                           The IRS Commissioner and the Assistant Secretary for Tax Policy have
                           convened a high-level Treasury/IRS task force to develop recommendations
                           to better administer the credit and make it easier for taxpayers to comply
                           with the rules. However, until IRS has designed and implemented effective
                           controls to deal with noncompliance and the erroneous refunds that result,
                           this will remain a high-risk area.



Establishing Measures      A sound organizational performance and human capital management
Comparable over Time and   system is essential for assessing how well IRS meets its goals and for
                           making program improvements. IRS has made progress in revamping its
Collecting Sufficient
                           performance management system by using its strategic planning,
Performance Data

                           9
                             U.S. General Accounting Office, Information on Payroll Taxes and Earned Income Tax
                           Credit Noncompliance, GAO-01-487T (Washington, D.C.: Mar. 7, 2001).
                           10
                            U.S. General Accounting Office, Earned Income Tax Credit Eligibility and
                           Participation, GAO-02-290R (Washington, D.C.: Dec. 14, 2001).




                           Page 12                                                GAO-03-109 Treasury Challenges
Major Performance and Accountability
Challenges




budgeting, and performance management process to reconcile competing
priorities and initiatives with the realities of available resources. Also, in
October 2001, IRS rolled out its new employee evaluation system for
frontline employees. This main human capital management system, like
that implemented earlier for executives and managers, was designed to
structurally align performance expectations for employees with IRS’s three
strategic goals to encourage behaviors and actions that support and
advance those goals. IRS has also made progress in developing a way to
measure the voluntary compliance of individual taxpayers without placing
undue burden on them. In late 2002, IRS started to collect data to measure
voluntary compliance, update criteria used to select tax returns for audit,
and make operational changes that could improve compliance.

While this progress is notable, several aspects of the performance
management system make measuring, assessing, and improving
organizational and employee performance risky. Our work over the past
couple of years has shown that IRS could do a better job of designing and
implementing performance measures and program evaluation practices
that support its on-going business operations, modernization efforts, and
budget requests. Further, IRS could make additional progress in linking its
budget request to intended results so that Congress could make more
informed budget decisions and better assess IRS’s use of resources. IRS
could also improve the alignment between strategic goals and elements of
the frontline employee performance management system and ensure that
the new performance management systems for frontline employees and
managers are working as intended.

To address these risky aspects, IRS needs to take a number of actions.
First, it needs to ensure that its organizational performance measures are
(1) objective and reliable; (2) consistent through time, and thus,
comparable; and (3) limited to key performance indicators. Second, IRS
needs to do more and better evaluations of its programs so it can better
determine the factors that affect program performance and identify ways to
use resources more effectively and improve service and compliance. Third,
and in keeping with the Government Performance and Results Act of 1993,
IRS should continue its efforts to better link budget requests with program
results. Finally, IRS should ensure that its human capital management
systems reinforce behaviors that support strategic goals by clearly aligning
employee and organizational objectives, ensuring that managers’
expectations are specific and output- or outcome-oriented, and monitoring
whether employee feedback is useful and aligned with IRS’s goals.




Page 13                                           GAO-03-109 Treasury Challenges
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                           Challenges




Addressing Financial       In addition to using performance measures to assess progress in improving
Management Weaknesses to   customer service and increasing compliance, IRS also needs to know the
                           cost of achieving these results. Reliable cost information is critical for IRS
Develop Reliable Cost-     management and Congress to determine whether IRS has the appropriate
Based Performance          levels of funding and staff and is effectively using them. However, serious
Information                financial management weaknesses—a high-risk area since 1995—hurt IRS’s
                           ability to develop reliable, cost-based performance information and to
                           ensure that resources were spent only in accordance with laws,
                           regulations, and management policy. To address these issues, we have
                           provided IRS with detailed management and operational
                           recommendations. IRS’s senior management has been proactive in
                           addressing these issues and has played a major role in the progress IRS has
                           achieved to date. However, resolving many of IRS’s most serious problems
                           will require a sustained, long-term commitment of resources, continued
                           involvement of senior management, and sustained progress in systems
                           modernization.

                           IRS has made significant progress in addressing its financial management
                           weaknesses, including addressing deficiencies in controls over budgetary
                           activity and its accountability over property and equipment (P&E). IRS
                           implemented procedures to deobligate funds no longer required for a
                           specific purpose, and developed compensating procedures to address
                           several of the budgetary control weaknesses we previously reported. For
                           example, IRS (1) instituted the routine review of contracts to better
                           manage obligational authority, (2) developed procedures to identify and
                           eliminate from the applicable general ledger accounts transactions that
                           were incorrectly recorded as adjustments to prior years’ obligations, and
                           (3) revised its accrual methodology to address reported deficiencies in
                           controls over the accurate recording of undelivered orders and accrued
                           expenses. IRS also continued its efforts to correct long-standing
                           deficiencies in systems and controls over its P&E. Specifically, IRS
                           (1) initiated annual physical inventories at its headquarters and its field
                           offices and is using the results to annually update its P&E inventory
                           records, (2) implemented a new inventory system for its automated data
                           processing assets, and (3) implemented procedures to improve the
                           timeliness of recording P&E acquisitions in its accounting records. While
                           further efforts are needed in both areas, IRS has made significant progress
                           since our last report.




                           Page 14                                           GAO-03-109 Treasury Challenges
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For fiscal year 2002, IRS was able to produce financial statements covering
its tax custodial and administrative activities that are fairly stated in all
material respects and was able to accomplish this 6 weeks after the end of
the fiscal year.11 This was a significant achievement and was the result of
tremendous dedication and effort on the part of IRS’s senior management
and staff, as well as some significant changes in certain business practices.
However, it also necessitated the continued use of costly, resource-
intensive processes to compensate for its long-standing and pervasive
internal control and systems deficiencies. IRS continues to lack timely,
accurate, and useful financial information and sound controls with which
to make fully informed decisions and to ensure ongoing accountability.
Despite the progress made, our audits of IRS’s fiscal year 2002 and 2001
financial statements continued to identify the existence of five material
weaknesses in internal controls and two instances of noncompliance with
provisions of the Internal Revenue Code related to the timing of IRS’s
releasing of tax liens and the structuring of installment agreements with
taxpayers. Additionally, we found that IRS’s financial management systems
continued to be in substantial noncompliance with the requirements of the
Federal Financial Management Improvement Act of 1996 (FFMIA).12

In fiscal year 2002, as in prior years, IRS did not have adequate financial
management systems to enable it to routinely and reliably generate and
report the information needed to prepare financial statements and manage
operations on an ongoing and timely basis. IRS did not always timely
record material transactions in its general ledger system, including taxes
receivable. In addition, IRS uses separate general ledgers to account for its
tax collection activities and the costs of conducting those activities,
respectively. This separation greatly complicates efforts to measure the
cost of its tax collection efforts.

IRS still lacks a centralized and integrated cost accounting system capable
of providing timely and reliable cost information related to its activities and
programs. Without such a system, managers may lack ready information to
manage costs and make decisions. During fiscal year 2002, IRS conducted
a comprehensive assessment of its strategic priorities as part of its
strategic planning process. A major goal of this exercise was to prioritize
IRS’s programs relative to its mission in light of its available resources. IRS


11
     GAO-03-243.
12
     P.L. 104-208.




Page 15                                            GAO-03-109 Treasury Challenges
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                        is using the outcome of this process as a basis for resource allocation
                        decisions. This initiative represents a major step forward in IRS’s efforts to
                        ensure it is using its resources as efficiently and effectively as possible. As
                        we have stated previously, addressing the financial management issues we
                        have reported on would enhance this process by providing sound, reliable,
                        and timely information to assist in evaluating the impact of these decisions
                        in terms of both the costs incurred and the benefits derived.

                        To address its need for reliable cost-based performance information, IRS is
                        developing a cost accounting system that is scheduled for implementation
                        in late 2003. Informed business decision making depends on this system’s
                        successful implementation.



Managing the Business   IRS’s multi-billion dollar Business Systems Modernization program is
Systems Modernization   critical to the success of the agency’s efforts to transform its manual, paper-
                        intensive business operations and fulfill its obligations under the IRS
Program                 Restructuring and Reform Act of 1998.13 IRS’s challenges in modernizing its
                        business systems date back to the mid-1990s, when we reported on a
                        number of technical and management weaknesses and made a series of
                        recommendations for correcting them and limiting modernization activities
                        and spending until they were corrected.14 It was then that we designated
                        the modernization program as a high-risk area.15 These challenges
                        remained virtually unchanged until 1999, as IRS made limited progress in
                        implementing our recommendations, and our ongoing reviews of the
                        program continued to identify additional weaknesses and produce
                        additional recommendations. Beginning in 1999, however, progress
                        improved, particularly with respect to strengthening IRS’s modernization
                        management controls and capabilities.




                        13
                             P.L. 105-206.
                        14
                          U.S. General Accounting Office, Tax Systems Modernization: Management and
                        Technical Weaknesses Must Be Corrected If Modernization Is to Succeed, GAO/AIMD-95-
                        156 (Washington, D.C.: July 26, 1995) and Tax Systems Modernization: Blueprint Is a Good
                        Start but Not Yet Sufficiently Complete to Build or Acquire Systems, GAO/AIMD/GGD-98-
                        54 (Washington, D.C.: Feb. 24, 1998).
                        15
                          U.S. General Accounting Office, High-Risk Series: An Overview, GAO/HR-95-1
                        (Washington, D.C.: February 1995).




                        Page 16                                                  GAO-03-109 Treasury Challenges
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Nevertheless, our last performance and accountability report continued to
show the modernization program as high-risk for three primary reasons:16
(1) modernization of IRS’s systems is vital to revamping how the service
does business and is integral to IRS achieving its customer-focused vision;
(2) the program is extremely complex and costly; and (3) IRS had not yet
fully corrected all of its modernization management weaknesses, thereby
increasing the risk that projects would not perform as intended and would
cost more and take longer than necessary.

Since then, IRS has made important progress in a number of areas. First, it
has progressed in establishing the infrastructure systems on which future
business applications will run. Establishing this infrastructure is a
necessary prerequisite to introducing the business applications that are
intended to provide benefits to taxpayers and IRS. Second, it has made
progress in delivering three applications (e.g., Internet Refund Fact of
Filing) that are producing benefits as of today. Third, progress has been
made in establishing the modernization management controls needed to
effectively acquire and implement information technology systems. For
example, IRS has developed and is using a modernization blueprint,
commonly called an enterprise architecture, to guide and constrain its
modernization projects, and is investing incrementally in its projects, both
of which are leading practices of successful public and private-sector
organizations.

Despite this important progress, IRS’s business systems modernization
program remains “challenged” and at high risk for two reasons. First, the
scope and complexity of the program are growing. Specifically, the number
of projects underway continues to expand and the tasks associated with
those projects that are moving beyond design and into development are by
their nature more complex and risky. Second, IRS’s modernization
management capacity is still maturing. For example, IRS has yet to fully
implement a strategic approach to ensuring that it has sufficient human
capital resources. It has also yet to fully implement management controls
in such areas as estimating costs, and employing performance-based
contracting methods.




16
     GAO-01-254.




Page 17                                          GAO-03-109 Treasury Challenges
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The challenge for IRS is to make sure the pace of systems acquisition
projects does not exceed the agency’s ability to manage them effectively,
which was a problem in the past. In February 2002 we reported17 such an
imbalance due to IRS’s first priority and emphasis being getting the newer,
more modern systems—with their anticipated benefits to taxpayers—up
and running. In so doing, however, management controls had not been
given equal attention and thus had not kept up. This emphasis on new
systems progress adds significant cost, schedule, and performance risk that
escalates as a program advances. Moreover, these risks are increased as
IRS moves forward because interdependencies among current ongoing
projects and the complexity of associated workload activities to be
performed increases dramatically as more system projects are built and
deployed.

In response to our concerns about projects getting ahead of the agency’s
ability to manage them effectively18 and congressional direction, IRS
scaled back its projects, giving priority to implementing needed
management capacity. Nevertheless, IRS has continued to move forward
with its ongoing infrastructure and business application system projects
while simultaneously taking steps to implement missing management
controls and capabilities, which in our view worsens the imbalance
between project workload and needed management capacity. In our
February 2002 report,19 we recommended that the Commissioner of
Internal Revenue reconsider the scope and pace of the program to better
balance it with the agency’s capacity to handle the workload. In response,
IRS took steps to align the pace of the program with the maturity of IRS’s
controls and management capacity, including reassessing the portfolio of
projects that it planned to proceed with during the remainder of fiscal year
2002. Also, IRS made significant progress in improving its modernization
management controls.

Although progress has been made, certain management controls have not
been fully implemented. IRS has reported that most projects have already


17
  U.S. General Accounting Office, Business Systems Modernization: IRS Needs to Better
Balance Management Capacity with Systems Acquisition Workload, GAO-02-356
(Washington, D.C.: Feb. 28, 2002).
18
  U.S. General Accounting Office, Business Systems Modernization: Results of Review of
IRS’ March 2001 Expenditure Plan, GAO-01-716 (Washington, D.C.: June 29, 2001).
19
     GAO-02-356.




Page 18                                                 GAO-03-109 Treasury Challenges
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                         encountered cost, schedule, and/or performance shortfalls. Our analysis
                         has shown that weak management controls contributed directly to these
                         problems. Given that IRS’s fiscal year 2003 systems modernization
                         spending plan supports progress toward the later phases of key projects
                         and continued development of other projects, systems modernization
                         projects may encounter additional cost, schedule, and performance
                         shortfalls.

                         IRS has acknowledged these risks and has initiatives planned or under way
                         to address them. However, timing is critical. While the lack of controls can
                         be risky in a project’s early stages, it is essential that such controls be in
                         place when multiple interdependent projects are being designed,
                         developed, and implemented. To mitigate this added risk, IRS needs to fully
                         implement the remaining management controls that we have
                         recommended. Until that time, the business systems modernization
                         program remains high risk, and we will continue to monitor IRS’s progress
                         in this area.



Implementing Effective   IRS needs to continue addressing long-standing computer security
Computer Security        weaknesses. Over the past 9 years, we have provided IRS with numerous
                         recommendations to assist it in addressing weaknesses in its computer
                         security controls.

                         IRS has continued to make progress improving computer security controls.
                         For example, IRS has revised its information technology security policy
                         and guidance, updated security standards for several of its computing
                         systems and devices, and improved certain physical security controls at its
                         data processing facilities. IRS is also consolidating several of its
                         geographically dispersed computer systems and centralizing responsibility
                         for their operation and maintenance, performing periodic internal control
                         reviews of its computer-processing environments, and implementing an
                         intrusion detection capability.




                         Page 19                                           GAO-03-109 Treasury Challenges
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Despite important progress, much work remains to be done to resolve the
serious weaknesses that threaten the confidentiality, integrity, and
availability of IRS systems and taxpayer information. IRS continues to have
serious weaknesses with computer controls designed to protect computing
resources, such as networks, computer equipment, software programs,
data, and facilities from unauthorized use, modification, loss, and
disclosure. Computer security weaknesses relate to electronic access
controls, physical security, segregation of duties, software change controls,
and service continuity. These weaknesses exist, in part, because IRS has
not yet fully implemented its agencywide computer security program. For
example, IRS does not always effectively configure and implement
computer systems in accordance with its computer security policies,
monitor system configuration and implementation, and provide sufficient
technical security-related training to key personnel. In addition, IRS has not
taken sufficient steps to ensure that computer security weaknesses
identified at one data processing facility are considered and addressed at
other facilities. These weaknesses led us to report, as part of our audit of
IRS’s fiscal year 2002 financial statements,20 that computer security was a
material weakness.21

These weaknesses decrease the reliability and increase the vulnerability of
data processed by IRS’s information systems, and continue to expose IRS’s
tax processing operations to disruption. Until IRS can adequately mitigate
these weaknesses, unauthorized individuals could gain access to critical
hardware and software, and intentionally or inadvertently add, alter, or
delete sensitive data or computer programs. Such individuals could also
obtain personal taxpayer information and use it to commit financial crimes
in the taxpayer’s name (identity fraud), such as establishing credit and
incurring debt.




20
 U.S. General Accounting Office, Financial Audit: IRS’s Fiscal Year 2002 and 2001
Financial Statements, GAO-03-243 (Washington, D.C.: Nov. 15, 2002).
21
 A material weakness is a condition that precludes the agency’s internal controls from
providing reasonable assurance that material misstatements in the financial statements
would be prevented or detected on a timely basis.




Page 20                                                   GAO-03-109 Treasury Challenges
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Improve Customs’s   For years Customs has been performing the dual missions of enforcing
                    laws to safeguard U.S. borders against the illegal entry of goods and of
Management of       regulating legitimate commercial activity. To carry out its responsibilities,
Multiple Missions   Customs has a total workforce of 19,500 employees at locations in the
                    United States and around the world. In fiscal year 2001, Customs reported
                    that its officers processed 142 million conveyances;22 472 million land, sea,
                    and air passengers; and over 23 million import entries with a value of over
                    $1 trillion, while collecting $23.8 billion in revenues. Customs has been
                    challenged to balance its security measures with the need to facilitate the
                    flow of cargo and people into the United States that is vital to our economy.
                    Traditionally, Customs’s primary security and enforcement focus had been
                    on preventing the smuggling of drugs into the country.

                    In January 2001, we identified a number of challenges facing Customs in
                    performing its dual missions.23 In addition to those we discuss in the
                    following sections, the challenges included (1) assessing progress on key
                    mission areas through the implementation of outcome-oriented
                    performance measures; (2) improving the manner in which airline
                    passengers who may be carrying contraband, such as illegal drugs, are
                    searched while respecting the rights of American citizens; and (3) using
                    reliable data to determine Customs’s staffing needs and to ensure that
                    personnel are deployed where they are needed. We have not conducted
                    follow-on work on these challenges since our January 2001 report because
                    the events of September 11, 2001, refocused our efforts primarily on
                    security challenges. Thus, we do not discuss these challenges in this report.

                    The events of September 11 changed Customs’s primary security and
                    enforcement focus. Shortly after the September 11 events, the
                    Commissioner of Customs said that terrorism has replaced drug smuggling
                    as the agency’s top priority, and that Customs’s traditional role in
                    preventing the smuggling of drugs and other contraband would be affected
                    by the new focus on terrorism. While the post-September 11 focus will be
                    on Customs being especially vigilant for keeping out of the country any
                    “implements of terrorism,” such as chemical, biological, or nuclear
                    materials that could be used as weapons, the agency still faces challenges
                    associated with trade compliance and overall border security. Immediately

                    22
                      Conveyances include aircraft, trucks, trains, buses, privately owned vehicles, and ocean
                    vessels.
                    23
                         GAO-01-254.




                    Page 21                                                    GAO-03-109 Treasury Challenges
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after the terrorist attacks on September 11, Customs went to a “Level 1”
alert across the country at all official border entry points—land border
ports of entry, seaports, and international airports. Level 1, according to
Customs, requires sustained, enhanced scrutiny and questioning of those
entering the United States, and includes increased inspections of travelers
and goods at every port of entry. Because of the continued terrorist threat,
Customs has remained on Level 1 alert.

At the same time, Customs is challenged to ensure that antiterrorism
efforts do not slow the flow of legitimate international commerce and
travel. According to Customs, Customs has worked with importers on
concerns such as where their goods originated, the physical security and
integrity of their overseas plants and those of their foreign suppliers, the
background of their personnel, the means by which they transport goods,
and those whom they have chosen to transport their goods into the
country. Customs has reaffirmed to importers the importance of knowing
their customer, and has examined the security practices of their freight
forwarders and the routes their shipments travel.

Concerning its diverse missions and responsibilities, our recently
completed and ongoing work has identified additional challenges that
directly or indirectly affect Customs’s efforts to improve security at U.S.
borders to safeguard against the illegal entry of goods, including potentially
harmful, hazardous, or otherwise illegal commodities. These challenges
include (1) improving differing international mail and package inspection
processes; (2) ensuring that various illegal items, including weapons of
mass destruction, do not enter the country in cargo containers at seaports;
and (3) acquiring a new import processing system. According to Customs,
the inspection of incoming foreign mail remains largely a manual process
that relies primarily on physical examination. One courier is working with
Customs to pilot test an advance manifest system, a computerized database
that receives cargo manifest information. The database will allow Customs
to analyze incoming package information and make more informed
decisions about what packages to inspect. Since our work on international
mail and containerized cargo processing involves information that Customs
considers to be law enforcement sensitive, we are precluded from further
discussing the challenges posed by mail and cargo processing in this
unclassified report.

Although Customs has made some progress in implementing initiatives that
are designed to improve the efficiency of its regulation of commercial
activities, additional challenges remain, particularly in view of the new and



Page 22                                           GAO-03-109 Treasury Challenges
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                         heightened emphasis on terrorism. These challenges include (1) continuing
                         to improve its evolving trade compliance program and (2) acquiring a new
                         trade processing system.



Enhance Evolving Trade   Tremendous growth in the volume and value of imports continues to create
Compliance Program       profound challenges for Customs to facilitate and enforce U.S. trade laws
                         and regulations. The volume of trade is expected to more than double, up
                         from $1 trillion in 1999 to surpassing $2 trillion in the year 2006. To speed
                         the processing of imports and improve compliance with trade laws,
                         Customs developed a strategy in response to the Customs Modernization
                         and Informed Compliance Act of 1993 (also known as the “Mod Act”).24

                         The Mod Act fundamentally altered the relationship between importers and
                         Customs by giving the importer the legal responsibility for declaring the
                         value, classification, and rate of duty applicable to merchandise being
                         imported into the United States. Customs, however, is responsible for
                         determining the final classification and value of the merchandise. The Mod
                         Act also gave Customs and importers a shared responsibility for ensuring
                         compliance with trade laws. To implement these new responsibilities,
                         Customs developed an “informed compliance strategy.”

                         In 1999, we reviewed Customs’s informed compliance strategy and found
                         that although Customs had monitored and evaluated certain aspects of the
                         key initiatives—account management, compliance assessment, compliance
                         measurement, and the informed and enforced compliance programs—it
                         had not evaluated, nor did it have a plan to evaluate, the impact of the
                         overall informed compliance strategy on compliance with trade laws.25
                         Consequently, we recommended that Customs develop and implement an
                         evaluation of the effectiveness of its informed compliance strategy.
                         Customs agreed with our recommendation and stated that it would study
                         the effectiveness of the program’s key initiatives.

                         Customs’s Trade Compliance Strategy Study was completed on May 24,
                         2001. It concluded that while the trade (informed) compliance strategy has


                         24
                              P. L. 103-182, title VI.
                         25
                          U.S. General Accounting Office, Customs Service Modernization: Impact of New Trade
                         Compliance Strategy Needs to Be Assessed, GAO/GGD-00-23 (Washington, D.C.:
                         Dec. 15, 1999).




                         Page 23                                               GAO-03-109 Treasury Challenges
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                           evolved logically, it has some limitations. The study also provided several
                           recommendations to address these findings. For example, the study
                           indicated that the initiatives do improve compliance, but the impact on
                           overall compliance rates is small. For example, the Company Enforced
                           Compliance Process (CECP) was created to address the compliance
                           problems of large importers whose noncompliance had a significant
                           negative impact on the overall national compliance rates. According to the
                           study, Customs was expected to punish noncomplying companies by
                           imposing “confirmed risk” designations, increasing examinations,
                           removing privileges, and referring for penalties. However, the confirmed
                           risk status was only used six times and loss of privileges and referral for
                           penalties were never used. The study concluded that CECP was not much
                           of an enforced compliance process, and it was discontinued.

                           However, according to Customs, the lessons learned from the program are
                           being incorporated into the next generation of compliance programs. On
                           the other hand, the study found that the companies’ compliance rates
                           increased after they participated in the compliance assessment and
                           account management initiatives. While it is not possible to attribute the
                           increase in compliance totally to these initiatives, the study concluded that
                           these programs had a positive impact. In any event, not losing sight of the
                           trade compliance program as the focus remains on terrorism will become
                           part of the challenge that lies ahead.



Acquisition of New Trade   Customs’s ongoing effort to acquire a new trade processing system is key to
System Remains             modernizing how Customs tracks, controls, and processes all commercial
                           goods imported into and exported out of the United States. This large and
Challenging
                           complex system, known as the Automated Commercial Environment
                           (ACE), is expected to cost about $1.7 billion and is to replace Customs’s
                           antiquated system. Expected benefits from ACE include speeding the flow
                           of legitimate commerce into and out of the United States, identifying and
                           targeting high-risk commerce requiring greater scrutiny, and providing a
                           single interface between the trade community and the federal government
                           for trade data. In April 2001, Customs awarded a 5-year contract, with
                           options to extend the contract to not more than 15 years, to a system
                           integrator responsible for developing and deploying ACE.




                           Page 24                                           GAO-03-109 Treasury Challenges
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Successfully managing a project as large and complex as ACE is a
challenging undertaking. Over the last 4 years, we have reported on ACE
and recommended steps Customs should take to minimize project risks,
including incrementally justifying ACE investment, ensuring ACE
alignment with Customs’s enterprise architecture, having sufficient human
capital resources, developing rigorous and analytically verifiable cost
estimates, and employing effective software acquisition processes.26 To its
credit, Customs has taken action to implement our recommendations, as
follows:

• Incrementally justifying ACE investment. Customs defined and
  committed to implement process controls for justifying and making
  ACE investment decisions incrementally. For the first of four planned
  ACE increments, Customs followed its investment process, which
  included preparing cost and benefit expectations and determining that
  the expected return on investment is favorable. After implementing the
  first ACE increment, Customs plans to verify that actual costs and
  benefits meet expectations. Customs plans to continue this incremental
  investment approach for the three remaining ACE increments.

• Ensuring ACE alignment with Customs’s enterprise architecture.
  Customs ensured that its enterprise architecture contained sufficient
  detail to build the first ACE release and has aligned the release with the
  enterprise architecture. Customs plans to continue to extend its
  enterprise architecture as necessary to build subsequent ACE releases.

• Having sufficient human capital resources. Customs developed and
  plans to implement a human capital management strategy for the
  Customs modernization office, which is responsible for managing the
  ACE acquisition. In its initial steps toward implementing this strategy,
  Customs increased the number of modernization office positions and
  raised the grade levels of other positions. Implementing this strategy is
  also expected to define the modernization office’s skill and capability

26
  U.S. General Accounting Office, Customs Service Modernization: Third Expenditure
Plan Meets Legislative Conditions, but Cost Estimating Improvements Needed,
GAO-02-908 (Washington, D.C.: Aug. 9, 2002); Customs Service Modernization:
Management Improvements Needed on High-Risk Automated Commercial Environment
Project, GAO-02-545 (Washington, D.C.: May 13, 2002); Customs Service Modernization:
Results of Review of First Automated Commercial Environment Expenditure Plan,
GAO-01-696 (Washington, D.C.: June 5, 2001); and Customs Service Modernization: Serious
Management and Technical Weaknesses Must Be Corrected, GAO/AIMD-99-41 (Washington,
D.C.: Feb. 26, 1999).




Page 25                                                 GAO-03-109 Treasury Challenges
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                          needs and training and reward programs for each modernization office
                          position.

                       • Developing rigorous and analytically verifiable cost estimating.
                         Customs began developing and plans to implement a cost estimating
                         program that employs the tenets of effective cost estimating as defined
                         by the Software Engineering Institute (SEI).

                       • Employing effective software acquisition processes. Customs continues
                         to make progress and has plans to establish effective software
                         acquisition process controls, as embodied primarily in the second level
                         of SEI’s Software Acquisition Capability Maturity Model.27

                       Customs has made progress in implementing some, but not all, of our
                       recommendations. Moreover, because Customs is in the early stages of
                       acquiring ACE, many challenging tasks remain before Customs will have
                       implemented full ACE capability.



Achieve Sound          A key to Treasury’s ability to effectively carry out its mission both at the
                       department level and as fiscal agent for the U.S. government is sound
Financial Management   financial management, including preparing information about the
through Sustained      government’s finances that is routinely available, accurate, and reliable.
                       Treasury faces many challenges in its ongoing efforts to improve the
Management Attention   accuracy and reliability of its financial management systems and correct
and Priority           internal control weaknesses that we and the Treasury Office of Inspector
                       General (OIG) identified at several of its bureaus and offices. Without
                       accurate and reliable financial systems and information, as well as sound
                       internal controls, Treasury cannot be sure that the information it has is
                       sufficient to manage day-to-day operations, measure the results of agency
                       and governmentwide operations, account for resources, collect taxes and
                       other debts owed the government, or safeguard assets. Sustained attention
                       and priority by top management will be required for Treasury to fully
                       address its financial management challenges.



                       27
                          Capability Maturity ModelSM is a service mark of Carnegie Mellon University, and CMM is
                       registered in the U.S. Patent and Trademark Office. The SA-CMM identifies key process
                       areas that are necessary to effectively manage software-intensive system acquisitions.
                       Achieving the second level of the SA-CMM’s five-level scale means that an organization has
                       the software acquisition rigor and discipline to repeat project successes.




                       Page 26                                                   GAO-03-109 Treasury Challenges
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Treasury received unqualified opinions on its fiscal years 2002 and 2001
departmentwide financial statements and for fiscal year 2002 issued its
financial statements 6 weeks after the end of the fiscal year. This was
primarily a result of costly, resource-intensive efforts to overcome major
financial management deficiencies at key bureaus—most notably, IRS, as
discussed earlier, and Customs. Compensating procedures have been used
and certain significant business process changes have been made to
produce materially accurate financial statements. Progress is being made
in addressing underlying systemic issues, but these efforts are still several
years away from achieving their intended outcomes. As a result,
management continues to lack access to timely, reliable, and accurate
information needed for day-to-day decisions. Treasury’s ability to
effectively fulfill its financial management responsibilities has also been
adversely affected by the lack of substantial compliance with the financial
management systems requirements detailed in FFMIA and weaknesses in
Customs’s internal controls over data in its automated systems.

Certain significant financial systems weaknesses, problems with
fundamental record keeping and financial reporting, incomplete
documentation, and weak internal controls, including computer controls,
have prevented the U.S. government from obtaining an opinion on the
reliability of its financial statements for the 5 years that we have reported
on these statements. As preparer of these financial statements, FMS has a
key responsibility to provide leadership and to work with agencies to
address some of these problems, in particular, the lack of sufficient
systems, controls, and procedures to properly prepare the government’s
financial statements. In performing much of Treasury’s role as primary
fiscal agent for the federal government, FMS has made significant progress
in addressing financial management issues related to implementing the
requirements of the Debt Collection Improvement Act of 1996 (DCIA)28 and
has taken actions to improve its computer security controls over systems
used to help it process collections and disbursements made on behalf of
the federal government. However, challenges remain to fully address these
issues.

In 2001, we reported that periods of budget surplus posed challenges for
Treasury’s debt management. At that time, surpluses were projected for
the next decade, and Treasury was reducing debt held by the public.
During fiscal year 2002, 4 consecutive years of surpluses in the unified


28
     P.L. 104-134.




Page 27                                           GAO-03-109 Treasury Challenges
                                Major Performance and Accountability
                                Challenges




                                budget of the federal government came to an end. With deficits projected
                                to continue for at least the next few years, we no longer consider managing
                                debt during large, sustained budget surpluses to be a challenge facing
                                Treasury in the near term.



Resolve Financial               Treasury reported for fiscal years 2002 and 2001 that its financial
Management Challenges           management systems did not substantially comply with the requirements of
                                FFMIA. In addition, we reported for fiscal year 2002 that IRS continued to
Affecting Certain Bureaus’
                                experience significant ongoing deficiencies in its financial management
Operations                      and operational systems and processes. Further, Customs continued to
                                face financial management problems, including weaknesses in its internal
                                controls over data in its automated systems and developing and
                                implementing new automated systems.

Bring Treasury’s Financial      FFMIA requires auditors performing financial audits of Chief Financial
Management Systems into         Officers Act agencies to report whether the financial management systems
Compliance with FFMIA           substantially comply with federal accounting standards, federal financial
                                management systems requirements, and the U.S. Standard General Ledger
                                at the transaction level. For fiscal year 2002, the Treasury OIG reported
                                that noncompliances were identified at IRS, FMS, Customs, and the U.S.
                                Mint. Generally, the noncompliances involved financial systems that did
                                not allow for reliably preparing certain financial statements and reports
                                without extensive compensating procedures, general ledgers that did not
                                conform with the U.S. Standard General Ledger, and weaknesses in
                                computer security controls. Under FFMIA, we are required to report
                                annually on agencies’ implementation of FFMIA by October 1 of each year.
                                Thus, we will continue to monitor Treasury’s efforts to substantially
                                comply with FFMIA.

Continue Work Resolving IRS’s   As discussed in an earlier section of this report, IRS continues to
Financial Management            experience significant deficiencies in its financial management and
Challenges                      operational systems and processes. Nevertheless, in fiscal year 2002, for
                                the third consecutive year, IRS produced financial statements covering its
                                tax custodial and administrative activities that are fairly stated in all
                                material respects. In addition, IRS was able to issue its fiscal year 2002
                                financial statements 6 weeks after the close of the fiscal year, whereas in
                                previous years, IRS needed 5 months to issue these statements. IRS’s
                                success in fiscal year 2002 is attributed to the hard work and commitment
                                of senior management and staff; significant changes in how the agency
                                processed certain transactions, maintained its records, and reported its



                                Page 28                                          GAO-03-109 Treasury Challenges
                             Major Performance and Accountability
                             Challenges




                             results; and continued refinements to compensating procedures used in
                             prior years to produce the financial statements. Nevertheless, because of
                             serious financial systems and control weaknesses, IRS had to rely
                             extensively on costly, resource-intensive processes, statistical projections,
                             external contractors, substantial adjustments, and monumental human
                             efforts. While IRS has made significant progress, it continues to face many
                             of the internal control weaknesses reported in previous years. In fiscal
                             year 2002, the following five areas remained material weaknesses:
                             (1) financial reporting, (2) unpaid tax assessments, (3) federal tax revenue
                             and refunds, (4) property and equipment, and (5) computer security. We
                             have provided IRS with detailed management and operational
                             recommendations so that it can address these issues. IRS has laid the
                             groundwork for sustainable improvements. Despite progress to date,
                             resolving many of IRS’s most serious problems will continue to require a
                             sustained commitment from senior management.

Support Further Activity     Customs continues to face financial management challenges, including
Strengthening Customs’s      weaknesses in internal controls over data in its automated systems, such as
Financial Management         systems that are used to account for and manage Customs’s collection
                             activity. In addition, as discussed in an earlier section of this report,
                             despite Customs’s progress in implementing recommendations we have
                             made over the past 4 years, numerous management weaknesses continue
                             to hinder progress toward developing Customs’s planned import system—
                             ACE—which is intended to replace the current system used for collecting
                             import-related data and ensuring, among other things, that trade-related
                             revenue is properly collected and allocated. To ensure proper
                             implementation of these initiatives, Customs management must continue
                             to provide the necessary support.



Manage Multiple Challenges   One of Treasury’s primary responsibilities is managing the federal
as Government’s Fiscal       government’s finances. In fiscal year 2002, this massive and complex task
                             included collecting more than $2.0 trillion in federal tax revenues, making
Agent
                             federal payments totaling about $1.0 trillion, managing federal debt held by
                             the public of about $3.6 trillion, performing central accounting functions,
                             and providing debt management services to federal agencies. Treasury’s
                             FMS is the government’s financial manager, central disburser, and
                             collections agency, as well as its accountant and reporter of financial
                             information. Treasury’s Bureau of the Public Debt (BPD) is responsible for
                             issuing Treasury securities and accounting for the resulting debt. For the
                             6 years that we have audited BPD’s Schedules of Federal Debt, we have
                             rendered “clean” opinions on these schedules.



                             Page 29                                           GAO-03-109 Treasury Challenges
                             Major Performance and Accountability
                             Challenges




                             In performing much of Treasury’s role as primary fiscal agent for the
                             federal government, FMS faces challenges in addressing financial
                             management issues related to (1) preparing the U.S. government’s financial
                             statements, (2) fully implementing the requirements of DCIA, and
                             (3) improving the computer security controls over systems used to help
                             process collections and disbursements made on behalf of most federal
                             agencies. FMS has made important progress in each of these areas.
                             However, it will take a significant and sustained commitment by FMS
                             management to fully address the challenges that still remain.

Prepare Reliable Financial   In our audit report on the government’s fiscal year 2001 financial
Statements                   statements, as in our audit reports for the previous 4 fiscal years, we
                             reported certain significant financial systems weaknesses, problems with
                             fundamental record keeping and financial reporting, incomplete
                             documentation, and weak internal control, including computer controls.
                             These deficiencies prevented the government from accurately reporting a
                             significant portion of its assets, liabilities, and costs and prevented us from
                             being able to form an opinion on the reliability of the government’s
                             financial statements. These deficiencies also affected the reliability of
                             much of the related information in the U.S. government’s Fiscal Year 2001
                             Financial Report and the underlying financial information. In addition,
                             they affect the government’s ability to accurately measure the full cost and
                             financial performance of certain programs and effectively manage related
                             operations. Many of these deficiencies will require significant efforts and
                             commitment by key agencies. As preparer of the government’s financial
                             statements, FMS has a major responsibility to provide leadership and to
                             work with agencies to address some of these problems, in particular, the
                             lack of sufficient systems, controls, and procedures to properly prepare the
                             government’s financial statements. Such deficiencies hinder the
                             government’s ability to (1) properly balance the government’s financial
                             statements and account for billions of dollars of transactions between
                             federal government entities (intragovernmental activity and balances),
                             (2) properly and consistently compile the information in the financial
                             statements, and (3) effectively reconcile the results of operations reported
                             in the financial statements with budget results.




                             Page 30                                            GAO-03-109 Treasury Challenges
                            Major Performance and Accountability
                            Challenges




                            We are working with FMS, the Office of Management and Budget (OMB),
                            and other key agencies to address these deficiencies. To help address
                            certain issues that contributed to the out-of-balance condition for
                            intragovernmental activity and balances, OMB has stated that it is
                            implementing the recommendations included in a study conducted for the
                            Joint Financial Management Improvement Program (JFMIP) in fiscal year
                            2001. OMB has taken actions to address core problems in this area,
                            including issuing governmentwide business rules for transactions among
                            trading partners29 and requiring quarterly reconciliations of
                            intragovernmental activity and balances beginning with the 3-month period
                            ended December 31, 2002. Treasury is developing and plans to implement a
                            new system and procedures to prepare the U.S. government’s consolidated
                            financial statements by fiscal year 2004. These actions are intended to,
                            among other things, directly link information from agencies’ financial
                            statements to amounts reported in the consolidated financial statements
                            and facilitate the reconciliation of net position. However, correcting these
                            problems is a significant challenge because of the government’s size and
                            complexity and the discipline needed to comply with accounting and
                            reporting requirements. Meeting these challenges will require a significant
                            commitment by agencies and FMS management combined with OMB’s
                            continued leadership as well as adequately trained staff and effective
                            automated financial information management systems.

Continue Efforts to Fully   As the federal government’s central debt collection agency, FMS30 provides
Implement DCIA              debt management services to federal agencies for nontax debts more than
                            180 days delinquent that are required by DCIA to be referred for collection
                            action. Nontax federal debt delinquent more than 180 days continues to be
                            significant governmentwide; Treasury reported that it totaled $63.3 billion
                            as of September 30, 2001, the last period for which certified data were
                            available.31 Given the magnitude of this debt, it is critically important that
                            all the debt collection provisions of DCIA be fully utilized to collect it. FMS
                            has made significant progress in implementing key provisions of DCIA, and

                            29
                              Trading partners are U.S. government agencies, departments, or other components
                            included in the U.S. government’s consolidated financial statements that do business with
                            each other.
                            30
                              The Secretary of the Treasury assigned FMS primary responsibility to fulfill Treasury’s
                            debt collection responsibilities under DCIA.
                            31
                              This amount includes debts that were written off by certain agencies for accounting
                            purposes but that agencies are still attempting to collect. It also includes only debts less
                            than 10 years delinquent.




                            Page 31                                                      GAO-03-109 Treasury Challenges
Major Performance and Accountability
Challenges




FMS officials now consider the agency’s debt collection program to be fully
mature. Several key challenges remain. Most importantly, it will be critical
for other federal agencies to make implementation of DCIA a priority, as
these agencies’ efforts and cooperation will play an important role in FMS’s
ability to successfully meet its challenges.

FMS reported collecting more than $2.8 billion during fiscal year 2002.32 Of
this amount, about $1.2 billion was nontax federal debt, and offsetting tax
refunds of delinquent debtors resulted in the vast majority of collections.
FMS’s successful merger of the Tax Refund Offset Program with the
Treasury Offset Program (TOP) in 1999 streamlined operations and
involved system enhancements that contributed to significant increases in
nontax debt collections from tax refund offsets. In addition, FMS began
offsetting Social Security benefit payments in May 2001, which resulted in
about $55 million in delinquent nontax debt collections for fiscal year 2002.

Building on the success FMS has experienced in offsetting tax refunds and
its progress in bringing Social Security benefit payments into TOP,
continued attention to nontax debt collections from federal salary payment
offsets is warranted as they remain low. To increase such collections, FMS
must be able to incorporate into TOP more federal salaries, including those
from the Department of Veterans Affairs. In addition, nonsalary payments
from numerous non-Treasury disbursing offices, including the Department
of Defense and the U.S. Postal Service, still need to be added to TOP.
Obtaining sustained commitment and cooperation from such agencies will
be key to FMS’s ability to bring more federal salaries and other payments
into TOP. Key challenges for FMS include continuing to work with the
agencies to identify those payments that are eligible to be offset and
working to help ensure that the agencies have adequate systems in place to
incorporate the payments into TOP.




32
  In addition to delinquent nontax federal debt, FMS collects child support obligations and
state income tax debt on behalf of states and tax levies for IRS. FMS reported collecting
more than $1.6 billion of such debt for states and IRS during fiscal year 2002.




Page 32                                                    GAO-03-109 Treasury Challenges
Major Performance and Accountability
Challenges




In addition to the offset programs, Treasury operates the only
governmentwide centralized debt collection center. This centralized
collection function, known as cross-servicing, may involve the use of
various debt collection tools, including private collection agencies (PCA)
and administrative wage garnishment (AWG). According to FMS, agencies’
cross-servicing referrals have been steadily increasing and collections from
cross-servicing have been increasing over the past 3 fiscal years. To
complement these positive trends, FMS still faces challenges in increasing
the program’s low collection rate. For example, FMS reports for September
2002 show that about $7.9 billion of debt was at the agency for cross-
servicing and that FMS’s debt management staff and PCAs collected about
$67 million for fiscal year 2002. Collections are challenging for FMS partly
because the debts are often old when agencies refer them. In fiscal year
2000, we reported that about 46 percent of the debts that had been referred
to FMS for cross-servicing during a period we reviewed were more than 4
years delinquent at the time of referral.33 In addition, in February 2002, we
reported that FMS’s own data showed that as of September 30, 2001, more
than 50 percent of the debt referred for cross-servicing governmentwide
was more than 2 years delinquent at the time of referral.34 We have
emphasized that industry statistics have shown that the likelihood of
recovering amounts owed decreased dramatically with the debt’s age of
delinquency. Clearly, to optimize its debt collection program, FMS faces
challenges in getting agencies to refer eligible debts when they are over
180 days delinquent, as required by DCIA and related Treasury regulations,
or sooner whenever practicable.

In addition, FMS’s job is becoming increasingly challenging as it is now
getting debts from more than 40 federal agencies. According to FMS
officials, certain recent referrals, such as Medicare Secondary Payer debts
from the Department of Health and Human Services, involve complexities
and issues that FMS debt collectors have not had to address in the past.

FMS is also faced with concerns about the accuracy, completeness, and
validity of debts reported by agencies as eligible for and excluded from the


33
  U.S. General Accounting Office, Debt Collection: Treasury Faces Challenges in
Implementing Its Cross-Servicing Initiative, GAO/AIMD-00-234 (Washington, D.C.: Aug. 4,
2000).
34
  U.S. General Accounting Office, Debt Collection Improvement Act of 1996: Status of
Selected Agencies’ Implementation of Administrative Wage Garnishment, GAO-02-313
(Washington, D.C.: Feb. 28, 2002).




Page 33                                                 GAO-03-109 Treasury Challenges
Major Performance and Accountability
Challenges




DCIA cross-servicing provisions. Over the years, we have identified and
reported on problems in this area. As of September 30, 2001, the last period
for which certified data were available, about 89 percent of the total debt
reported by the agencies as more than 180 days delinquent was shown as
excluded from cross-servicing.

It is important to note that in AWG, Congress gave agencies, including FMS,
a powerful instrument for collecting debt or leveraging payment from
delinquent debtors.35 FMS has recently incorporated AWG into its cross-
servicing program. FMS views AWG as a collection tool of last resort and
does not contemplate initiating its use in most cases until the debt has been
with FMS for cross-servicing for at least 90 days. As of August 2002, more
than 6 years after the enactment of DCIA, only four agencies had
authorized FMS to perform this important debt collection function on their
behalf.

Going forward, it will be important for FMS to be able to incorporate more
payments into its offset program. FMS will also need to determine whether
its current cross-servicing strategy, which involves its own debt collectors
and its PCA contractors, maximizes collections most cost-effectively
through prompt use of all appropriate debt collection tools, including AWG.
Therefore, we have previously recommended that FMS comprehensively
review its cross-servicing process and also that FMS utilize AWG along with
other debt collection tools.36 It will also be important for FMS to continue
to seek the cooperation of OMB and the agencies’ OIGs to help ensure that
eligible delinquent debts are identified and promptly referred by the
agencies for cross-servicing. In this regard, we have recommended that
FMS work with OMB and the agencies’ OIGs to develop and implement a
process for obtaining periodic independent verification of the accuracy,
completeness, and validity of debts reported by agencies as eligible and
excluded from DCIA cross-servicing provisions.37 FMS is currently
addressing certain of these recommendations. FMS did not agree with all
the specific aspects of our recommendations to comprehensively review its
cross-servicing process or to use AWG in conjunction with other debt
collection tools.


35
  Certain debt collection experts have emphasized that the mere threat of using AWG is
often enough to motivate people to pay their delinquent debts.
36
     GAO/AIMD-00-234 and GAO-02-313.
37
     GAO/AIMD-00-234.




Page 34                                                   GAO-03-109 Treasury Challenges
                            Major Performance and Accountability
                            Challenges




Strengthen FMS’s Computer   FMS maintains multiple financial and information systems to help it
Security Controls           process and reconcile moneys disbursed and collected by the various
                            federal agencies. Our audit for fiscal year 2000 and previous years
                            identified significant computer security control weaknesses at each of the
                            FMS data centers. For fiscal years 2002 and 2001, the Treasury OIG
                            continued to report computer security control weaknesses at FMS. FMS
                            has made important progress in addressing its computer security control
                            problems. However, weaknesses continued to exist at FMS primarily
                            because it still lacks an effective, entitywide computer security
                            management program. These weaknesses at FMS and its contractor data
                            centers place billions of dollars of payments and collections at risk of loss
                            or fraud. Sensitive data are at risk of inappropriate disclosure, and
                            computer-based operations are at risk of disruption. The severity of these
                            risks magnifies as FMS expands its networked environment through the
                            migration of its financial applications from mainframes to client-server
                            environments. Thus, as FMS provides users greater and easier access to
                            larger amounts of data and system resources, well-designed and effective
                            computer security controls are essential if FMS’s operations and computer
                            resources are to be properly protected.




                            Page 35                                           GAO-03-109 Treasury Challenges
Major Performance and Accountability
Challenges




We and the Treasury OIG have made numerous recommendations for
improvements in FMS’s computer security controls to help reduce the
exposure to these risks. According to FMS officials, FMS has taken and
will continue to take actions to correct the identified weaknesses.
However, FMS’s entitywide security control structure has yet to fully
address the significant risks associated with its current and evolving
computing environment. In response to our prior years’ recommendation
that FMS establish an effective security program, FMS has taken important
steps, including revising and publishing information technology security
policies and standards in June 2002. FMS stated that it has accelerated its
plan to implement an entitywide security program and has appointed
division information officers in each business area to provide the additional
support needed to coordinate this effort. FMS has also appointed a senior
executive to oversee audit findings, evaluate its entitywide security
program using the Federal IT Security Assessment Framework, and
implement a program plan and milestones to achieve a security program
effectiveness of Level 3, Implemented Procedures and Controls.38 FMS
stated that computer security remains one of its top priorities and that it is
completely dedicated to fully implementing and maintaining an effective
and robust security program. It will take a significant and sustained
commitment by FMS management to fully address the computer security
control weaknesses. We will follow up on these matters during our audits
of the federal government’s financial statements.




38
  The Framework provides a method for agency officials to (1) determine the current status
of their security programs relative to the existing policy and (2) where necessary, establish a
target for improvement. The Framework identifies five levels of security effectiveness:
Level 1, Documented Policy; Level 2, Documented Procedures; Level 3, Implemented
Procedures and Controls; Level 4, Tested and Reviewed Procedures and Controls; and Level
5, Fully Integrated Procedures and Controls.




Page 36                                                      GAO-03-109 Treasury Challenges
GAO Contacts




               Subjects covered in this report                Contact person
               Modernize IRS
               • Improving service to taxpayers               James R. White, Director
               • Collection of unpaid taxes                   Tax Issues
               • Earned income credit noncompliance           (202) 512-8650
               • Establishing measures comparable over        WhiteJ@GAO.Gov
                 time and collecting sufficient performance
                 data
               Modernize IRS
               • Addressing financial management              Steven J. Sebastian, Director
                 weaknesses to develop reliable cost-         Financial Management and Assurance
                 based performance information                (202) 512-3406
                                                              SebastianS@GAO.Gov
               Modernize IRS
               • Managing the business systems                Robert F. Dacey, Director
                 modernization program                        Information Technology
               • Implementing effective computer security     (202) 512-3870
                                                              DaceyR@GAO.Gov
               Improve Customs Management
               • Enhance evolving trade compliance            Laurie E. Ekstrand, Director
                 program                                      Justice Issues
                                                              (202) 512-8777
                                                              EkstrandL@GAO.Gov
               Improve Customs Management
               • Acquisition of new trade system              Randolph C. Hite, Director
                                                              Information Technology Architecture and
                                                              Systems
                                                              (202) 512-3870
                                                              HiteR@GAO.Gov
               Achieve Sound Financial Management
               • Bring Treasury’s financial management        Gary T. Engel, Director
                 systems into compliance with FFMIA           Financial Management and Assurance
               • Support further activity strengthening       (202) 512-3406
                 Customs’s financial management               EngelG@GAO.Gov
               • Prepare reliable U.S. government financial
                 statements
               • Continue efforts to fully implement DCIA
               • Strengthen FMS’s computer security
                 controls
               Achieve Sound Financial Management
               • Continue work resolving IRS’s financial      Steven J. Sebastian, Director
                 management challenges                        Financial Management and Assurance
                                                              (202) 512-3406
                                                              SebastianS@GAO.Gov




               Page 37                                                     GAO-03-109 Treasury Challenges
Related GAO Products



IRS          Internal Revenue Service: Status of Recommendations from Financial
             Audits and Related Financial Management Reports. GAO-02-848.
             Washington, D.C.: July 30, 2002.

             Management Report: Improvements Needed in IRS’s Accounting
             Procedures and Internal Controls. GAO-02-746R. Washington, D.C.:
             July 18, 2002.

             Performance Management Systems: IRS’s Systems for Frontline
             Employees and Managers Align with Strategic Goals but Improvements
             Can Be Made. GAO-02-804. Washington, D.C.: July 12, 2002.

             IRS’s Budget Justification: Options for Structure and Content.
             GAO-02-711R. Washington, D.C.: July 8, 2002.

             Tax Administration: New Compliance Research Is on Track, but
             Important Work Remains. GAO-02-769. Washington, D.C.: June 27, 2002.

             Tax Administration: Impact of Compliance and Collection Program
             Declines on Taxpayers. GAO-02-674. Washington, D.C.: May 22, 2002.

             Tax Administration: Continued Progress Modernizing IRS Depends on
             Managing Risks. GAO-02-715T. Washington, D.C.: May 14, 2002.

             Earned Income Credit: Opportunities to Make Recertification Program
             Less Confusing and More Consistent. GAO-02-449. Washington, D.C.:
             April 25, 2002.

             Tax Administration: IRS Continues to Face Management Challenges in
             Its Business Practices and Modernization Efforts. GAO-02-619T.
             Washington, D.C.: April 15, 2002.

             Internal Revenue Service: Enhanced Efforts to Combat Abusive Tax
             Schemes—Challenges Remain. GAO-02-618T. Washington, D.C.: April 11,
             2002.

             Internal Revenue Service: Assessment of Budget Request for Fiscal Year
             2003 and Interim Results of 2002 Tax Filing Season. GAO-02-580T.
             Washington, D.C.: April 9, 2002.




             Page 38                                       GAO-03-109 Treasury Challenges
Related GAO Products




Business Systems Modernization: IRS Needs to Better Balance
Management Capacity with System Acquisition Workload. GAO-02-356.
Washington, D.C.: February 28, 2002.

Tax Administration: Assessment of IRS’ 2001 Tax Filing Season.
GAO-02-144. Washington, D.C.: December 21, 2001.

Earned Income Tax Credit Eligibility and Participation. GAO-02-290R.
Washington, D.C.: December 14, 2001.

IRS Telephone Assistance: Limited Progress and Missed Opportunities to
Analyze Performance in the 2001 Filing Season. GAO-02-212.
Washington, D.C.: December 7, 2001.

Tax Administration: Millions of Dollars Could Be Collected If IRS Levied
More Federal Payments. GAO-01-711. Washington, D.C.: July 20, 2001.

Business Systems Modernization: Results of Review of IRS’ March 2001
Expenditure Plan. GAO-01-716. Washington, D.C.: June 29, 2001.

Tax Administration: Status of IRS’ Efforts to Develop Measures of
Voluntary Compliance. GAO-01-535. Washington, D.C.: June 18, 2001.

Business Systems Modernization: Results of Review of IRS’ Customer
Account Data Engine Project. GAO-01-717. Washington, D.C.: June 12,
2001.

IRS Modernization: Continued Improvement in Management Capability
Needed to Support Long-Term Transformation. GAO-01-700T.
Washington, D.C.: May 8, 2001.

IRS Audit Rates: Rate for Individual Taxpayers Has Declined But Effect
on Compliance Is Unknown. GAO-01-484. Washington, D.C.: April 25,
2001.

IRS Telephone Assistance: Quality of Service Mixed in the 2000 Filing
Season and Below IRS’ Long-Term Goal. GAO-01-189. Washington, D.C.:
April 6, 2001.

Internal Revenue Service: Progress Continues But Serious Management
Challenges Remain. GAO-01-562T. Washington, D.C.: April 2, 2001.




Page 39                                       GAO-03-109 Treasury Challenges
          Related GAO Products




          IRS Modernization: IRS Should Enhance Its Performance Management
          System. GAO-01-234. Washington, D.C.: February 23, 2001.

          IRS Telephone Assistance: Opportunities to Improve Human Capital
          Management. GAO-01-144. Washington, D.C.: January 30, 2001.

          Tax Systems Modernization: Results of Review of IRS’ Third Expenditure
          Plan. GAO-01-227. Washington, D.C.: January 22, 2001.

          Tax Systems Modernization: Results of Review of IRS’ March 7, 2000,
          Expenditure Plan. GAO/AIMD-00-175. Washington, D.C.: May 24, 2000.



Customs   Customs and INS: Information on Inspection, Infrastructure, Traffic
          Flow, and Security Matters at the Detroit Port of Entry. GAO-02-595R.
          Washington, D.C.: April 22, 2002.

          U.S. Customs Service: Observations on Selected Operations and Program
          Issues. GAO-01-968T. Washington, D.C.: July 17, 2001.

          Customs Service: The Self-Inspection Program Shows Promise but
          Remains a Work in Progress. GAO-01-676. Washington, D.C.: June 1,
          2001.

          Customs Service: Effects of Proposed Legislation on Officers’ Pay. GAO-
          01-304. Washington, D.C.: January 31, 2001.

          Customs Service Modernization: Results of Review of First Automated
          Commercial Environment Expenditure Plan. GAO-01-696. Washington,
          D.C.: June 5, 2001.

          Customs Service Modernization: Management Improvements Needed on
          High-Risk Automated Commercial Environment Project. GAO-02-545.
          Washington, D.C.: May 13, 2002.

          Customs Service Modernization: Third Expenditure Plan Meets
          Legislative Conditions, but Cost Estimating Improvements Needed.
          GAO-02-908. Washington, D.C.: August 9, 2002.




          Page 40                                        GAO-03-109 Treasury Challenges
                       Related GAO Products




Financial Management   Debt Collection Improvement Act of 1996: Major Data Sources
                       Inadequate for Implementing the Debtor Bar Provision. GAO-02-462.
                       Washington, D.C.: March 29, 2002.

                       Debt Collection Improvement Act of 1996: Status of Selected Agencies’
                       Implementation of Administrative Wage Garnishment. GAO-02-313.
                       Washington, D.C.: February 28, 2002.

                       Debt Collection Improvement Act of 1996: Department of Agriculture
                       Faces Challenges Implementing Certain Key Provisions. GAO-02-277T.
                       Washington, D.C.: December 5, 2001.

                       Debt Collection Improvement Act of 1996: Agencies Face Challenges
                       Implementing Certain Key Provisions. GAO-02-61T. Washington, D.C.:
                       October 10, 2001.

                       Debt Management: Insights and Tools from Selected Nations. GAO-02-14.
                       Washington, D.C.: November 21, 2001.

                       Federal Debt: Debt Management Actions and Future Challenges.
                       GAO-01-317. Washington, D.C.: February 28, 2001.

                       U.S. Government Financial Statements: FY 2001 Results Highlight the
                       Continuing Need to Accelerate Federal Financial Management Reform.
                       GAO-02-599T. Washington, D.C.: April 9, 2002.

                       Financial Management Service: Significant Weaknesses in Computer
                       Controls Continue. GAO-02-317. Washington, D.C.: January 31, 2002.

                       Financial Audit: IRS’s Fiscal Years 2002 and 2001 Financial Statements.
                       GAO-03-243. Washington, D.C.: November 15, 2002.

                       Internal Revenue Service: Progress Made, but Further Actions Needed to
                       Improve Financial Management. GAO-02-35. Washington, D.C.: October
                       19, 2001.

                       Financial Audit: Bureau of the Public Debt's Fiscal Years 2002 and 2001
                       Schedules of Federal Debt. GAO-03-199. Washington, D.C.: November 1,
                       2002.




                       Page 41                                       GAO-03-109 Treasury Challenges
Performance and Accountability and High-
Risk Series

              Major Management Challenges and Program Risks: A Governmentwide
              Perspective. GAO-03-95.

              Major Management Challenges and Program Risks: Department of
              Agriculture. GAO-03-96.

              Major Management Challenges and Program Risks: Department of
              Commerce. GAO-03-97.

              Major Management Challenges and Program Risks: Department of
              Defense. GAO-03-98.

              Major Management Challenges and Program Risks: Department of
              Education. GAO-03-99.

              Major Management Challenges and Program Risks: Department of
              Energy. GAO-03-100.

              Major Management Challenges and Program Risks: Department of
              Health and Human Services. GAO-03-101.

              Major Management Challenges and Program Risks: Department of
              Homeland Security. GAO-03-102.

              Major Management Challenges and Program Risks: Department of
              Housing and Urban Development. GAO-03-103.

              Major Management Challenges and Program Risks: Department of the
              Interior. GAO-03-104.

              Major Management Challenges and Program Risks: Department of
              Justice. GAO-03-105.

              Major Management Challenges and Program Risks: Department of
              Labor. GAO-03-106.

              Major Management Challenges and Program Risks: Department of State.
              GAO-03-107.

              Major Management Challenges and Program Risks: Department of
              Transportation. GAO-03-108.




              Page 42                                    GAO-03-109 Treasury Challenges
Performance and Accountability and High-
Risk Series




Major Management Challenges and Program Risks: Department of the
Treasury. GAO-03-109.

Major Management Challenges and Program Risks: Department of
Veterans Affairs. GAO-03-110.

Major Management Challenges and Program Risks: U.S. Agency for
International Development. GAO-03-111.

Major Management Challenges and Program Risks: Environmental
Protection Agency. GAO-03-112.

Major Management Challenges and Program Risks: Federal Emergency
Management Agency. GAO-03-113.

Major Management Challenges and Program Risks: National
Aeronautics and Space Administration. GAO-03-114.

Major Management Challenges and Program Risks: Office of Personnel
Management. GAO-03-115.

Major Management Challenges and Program Risks: Small Business
Administration. GAO-03-116.

Major Management Challenges and Program Risks: Social Security
Administration. GAO-03-117.

Major Management Challenges and Program Risks: U.S. Postal Service.
GAO-03-118.

High-Risk Series: An Update. GAO-03-119.

High-Risk Series: Strategic Human Capital Management. GAO-03-120.

High-Risk Series: Protecting Information Systems Supporting the
Federal Government and the Nation’s Critical Infrastructures.
GAO-03-121.

High-Risk Series: Federal Real Property. GAO-03-122.




Page 43                                      GAO-03-109 Treasury Challenges
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