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TSM PROBLEMS IMPACT IRS'
FINANCIAL INFORMATION

IRS' capability to develop and make automated systems changes is an area of continuing concern, as we have discussed in our reports and testimonies on IRS' Tax Systems Modernization (TSM). (See attachment I.) In March 1996, we testified before the Subcommittee on IRS' significant challenges in financial management and systems modernization, which are central to IRS' guardianship of federal revenues and ability to function efficiently in an increasingly technological environment.

In summary, IRS has initiated actions that begin to implement the dozens of recommendations we have previously made to correct management and technical problems in developing TSM. Many of these actions are still incomplete and do not yet respond fully to any of our recommendations. As a result, until IRS makes more progress in correcting its management and technical weaknesses, its ability to develop systems and make changes to correct financial management problems will be hampered.

IRS TOUCHES FINANCIAL REPORTING
ACROSS GOVERNMENT

The CFO Act, as expanded by the Government Management Reform Act of 1994, requires the 24 CFO Act agencies to prepare, and subject to audit, financial statements covering all accounts and associated activities of each office, bureau, and activity of the agency. This requirement begins with agencies' financial statement for fiscal year 1996. Audit reports are to be prepared by March 1 of 1997 and each year thereafter.

In addition to agencywide financial statements, the expanded CFO Act requires the Secretary of the Treasury to annually prepare consolidated financial statements depicting the Executive Branch's financial status. This requirement begins with financial statements for fiscal year 1997; GAO is to audit them by March 31 of each year, beginning in 1998.

IRS' financial information will provide significant input to the preparation and audit of both Treasury's agencywide and the governmentwide financial statements. For example:

With $1.4 trillion in tax revenue, IRS accounts for the vast majority of the government's total reported fiscal year 1995 revenue.

IRS' $113 billion in reported accounts receivables is over two-thirds, or about 68 percent, of the government's total fiscal year 1995 accounts receivables, which Treasury reported to be more than $166 billion.

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Also, IRS financial reporting affects the financial reports of the government agencies for which IRS collects tax receipts, such as the Social Security Administration for the Social Security Trust Fund and the Department of Labor for the Unemployment Trust Fund. Beginning in fiscal year 1998, to meet federal accounting standards, IRS will have to disclose the reasons for any continuing noncompliance with the laws relating to the disposition of tax revenue to trust funds and the amount of over- or underfunding, if reasonably estimable.

As a central government financial management leader, it is essential for the Department of the Treasury to ensure that the problems IRS faces in preparing financial statements on its operations are promptly resolved so that these problems do not delay the preparation, or affect the credibility, of Treasury's agencywide financial statements. Also, unless IRS' financial management problems are dealt with, they will affect the ability to render an opinion on the governmentwide financial statements.

IRS FOLLOW-THROUGH WILL BE CRITICAL

In summary, it will be essential for IRS to follow-through and ensure that its planned short-term, interim actions are completed on schedule to improve the reliability of IRS' financial statements, and we will continue to work with IRS in doing so. We also will continue to monitor IRS' efforts to complete our recommendations and implement longer-term systems improvements. The Subcommittee's continued oversight of IRS' progress in implementing the CFO Act and preparing auditable financial statements will provide important impetus as well.

Mr. Chairman, this concludes my statement. now respond to any questions.

I would be happy to

ATTACHMENT I

ATTACHMENT I

RECENT GAO REPORTS AND TESTIMONIES
RELATED TO IRS' FINANCIAL MANAGEMENT AND TSM PROBLEMS

FINANCIAL AUDIT REPORTS

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

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

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

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

REPORTS AND TESTIMONIES RELATED TO IRS FINANCIAL AUDITS AND TSM

IRS Operations: Significant Challenges in Financial Management and Systems Modernization (GAO/T-AIMD-96-56, March 6, 1996)

Tax Systems Modernization: Management and Technical Weaknesses Must Be Overcome To Achieve Success (GAO/T-AIMD-96-75, March 26, 1996)

Tax Systems Modernization: Progress in Achieving IRS' Business
Vision (GAO/T-GGD-96-123, May 9, 1996)

Letter to the Chairman, Committee on Governmental Affairs, U.S.
Senate, on security weaknesses at IRS' Cyberfile Data Center
(AIMD-96-85R, May 9, 1996)

Financial Audit: Actions Needed to Improve IRS Financial
Management (GAO/T-AIMD-96-96, June 6, 1996)

Tax Systems Modernization: Actions Underway But IRS Has Not Yet Corrected Management and Technical Weaknesses (GAO/AIMD-96-106, June 7, 1996)

Tax Systems Modernization: Cyberfile Project was poorly Planned and Managed (GAO/AIMD-96-140, August 26, 1996)

Internal Revenue Service: Business Operations Need Continued
Improvement (GAO/AIMD/GGD-96-152, September 9, 1996)

Internal Revenue Service: Critical Need to continue Improving Core Business Practices (GAO/T-AIMD/GGD-96-188, September 10, 1996)

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Mr. HORN. We are going to follow the 5-minute rule on questions. Mrs. Maloney and I will alternate so that we all have a crack at it and we might alternate 20 times, for all I know.

Mrs. MALONEY. I have to be on the floor. Mr. HORN. Oh, you have to? Mrs. MALONEY. If you will excuse me, I have been called to the floor for the debate.

Mr. HORN. You speak for me, too, over there. I should be there, too, fighting that battle. Well, thank you for coming.

Mrs. MALONEY. Mr. Chairman, I just want to say for the record how much I have enjoyed working with you this year. I believe this is the last hearing? You have got another one coming?

Mr. HORN. We might have a couple after the election. Either you will be chairman or I will be chairman.

Mrs. MALONEY. In this session? Mr. HORN. Yes. Gene, what I am curious about on this plan-you are absolutely right and I am sure we will discuss it more with representatives of the IRS—but of the 59 recommendations, obviously, when you make them, these are not incrementally or sequentially to be followed.

Mr. DODARO. Right. Mr. HORN. Has a plan been developed of what the big picture is so we can deal with that?

Have we separated the minutiae that would be nice to have down from the basic goal achiever that will get us there? Where are we on that? What are we talking about?

Mr. DODARO. I think we are at different places, Mr. Chairman. I think on the administrative accounting area we have got a good plan that will get us there and it is just a matter of execution. This is on the reconciling the cash accounts with Treasury and having documentation for receiving goods and services other than payroll, which are computers, hardware, and other services from Government agencies. I think we are close there and I think it is just a matter of putting in the discipline to get the documentation and to get the transactions recorded properly and follow the right procedures.

In the revenue area, I do not think we have clearly—the Service has yet a clear vision of how to fix that problem long term. They are developing solutions in that area and I think that-I am encouraged by the fact that they are beginning to talk about it, but I do not think we are there yet in the revenue arena. That is tied up in their ability to develop systems generally. I do think that we are not going to be able to solve that problem with one silver bullet, so I think making incremental progress is important. I think a lot of the data is in the current revenue systems, but there is such poor documentation of that system that they are having difficulty reconciling the amounts. And as you know, Mr. Chairman, you have held hearings on the year 2000 problem, about the problems that can be created by the lack of documentation, and it is also characteristic of organizations. We are going to have a continuing dialog with them on that, but I would say the fix is in place for the revenue area are going to take us only a certain percentage of the way.

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